Dividend Definition
Dividends are distributions in the form of cash or additional stock given to the investors from a publicly traded firm, mutual fund, or exchange-traded fund (ETF).1 Dividends come from the company’s earnings and can be allocated on a regular frequency or on an ad-hoc basis. Dividends are common in the basic materials, oil and gas, banks and financials, healthcare and pharmaceuticals, and utilities industries. Dividends are less common in the technology and biotech industries as they often reinvest their earnings into company growth.1
Investors evaluate companies based on their dividend payment using the dividend yield factor, which is the dividend as a percent of current firm stock price.1 Another measure used is dividends per share (DPS). DPS is the dollar amount of dividends received per each share of stock. However, dividends are only one part of the returns a person can receive on an investment, so it is important to also consider interest, increases in stock price, and other capital gains when making an investment decision.1
Types of Dividends: Payers and Growers
Some dividend-paying firms pay a consistent dollar amount per share dividend over time while others seek to grow the dividend amount over time.2 The investments known as dividend payers are those that pay consistent dividends over time. Dividend growers are those that seek to increase their dividend amount paid each period. To evaluate dividend growers, investors can use the dividend growth rate which is calculated by taking an average of dividend payments over multiple periods.2
Why Dividends
A firm’s ability to pay dividends can indicate that the company is financially stable and healthy.3 Usually, profitable companies will pay dividends and will even grow their dividend payment over time.3 It is rare for a dividend-paying firm to discontinue dividend payments (because discontinuing dividend payments can indicate financial turmoil).4 That said, dividends are not the only measure of financial profitability.3 As stated earlier, many profitable firms reinvest their earnings into the business to continue their growth.3
Another benefit of dividend-paying investments is that they can reduce portfolio risk.4 Investors can usually rely on dividends as a source of wealth even when there is volatility in the market that causes stock price to go up and down.4 In addition, research has shown that investments that pay dividends tend to outperform (or decline less) than non-dividend-paying stocks during bear markets.4 For example, in the market downturn of 2002, dividend-paying stocks were down an average of 10% while non-dividend-paying stocks dropped an average of 30%.4
For those that do not reinvest their dividends, the dividend payout can be used as a consistent source of income. Many retirees transition to a more dividend-heavy stock portfolio to generate income when they lose the income of their job. These dividend-paying can also provide some downside protection for risk-averse retirees (as listed above).4
Dividends can also provide some tax advantages.4 Some dividends are taxed at lower rates than traditional income.4 This means investors, especially retirees, can benefit from paying less in taxes do to utilizing dividends as income.4
Dogs of the Dow
The Dow Jones Industrial Average (DJIA) index consists of 30 global blue-chip companies that all pay dividends.5 Dogs of the Dow is an investment strategy that invests in the 10 highest dividend-yielding stocks on the DJIA.6 The goal of Dogs of the Dow is to beat the returns of the DJIA.5 This year’s Dogs of the Dow 2020 picks include Verizon, Chevron, and Cisco Systems to name a few.7 For investors interested in the Dogs of the Dow, the complete list of companies as well as YTD performance can be found here.
Dividend Aristocrats
In addition to the Dogs of the Dow, there are also “dividend aristocrats.”8 Dividend aristocrats include all firms from the S&P 500 index that have increased their dividend payments annually for 25 or more years.8 There are 66 companies that fit that category for 2020.8 For investors interested in the dividend aristocrats, the complete list for 2020 can be found here.
To discuss whether dividend-focused investments are the right fit for your portfolio, schedule an appointment or reach out to our office at 772-888-3757.
Sources:
- Guide to Dividend Investing: https://www.investopedia.com/terms/d/dividend.asp
- Dividend Growth Rate: https://www.investopedia.com/terms/d/dividendgrowthrate.asp
- Why Dividends Matter to Investors: https://www.investopedia.com/articles/fundamental/03/102903.asp
- 5 Reasons Why Dividends Matter to Investors: https://www.investopedia.com/articles/investing/091015/5-reasons-why-dividends-matter-investors.asp
- Dogs of the Dow: https://www.investopedia.com/terms/d/dogsofthedow.asp
- Dogs of the Dow: https://www.dogsofthedow.com/
- Dogs of the Dow 2020: 10 Dividend Stocks to Watch: https://www.kiplinger.com/slideshow/investing/t018-s001-dogs-of-the-dow-10-dividend-stocks-to-watch-2020/index.html
- 2020’s Dividend Aristocrats List: All 66 Stocks: https://money.usnews.com/investing/stock-market-news/slideshows/dividend-stocks-aristocrats