One of the ways
to judge a stock’s performance is by the rate of growth of its share price. It’s easy to focus only on capital gains, but one often-overlooked aspect of investing is dividends. The potential growth of dividends paid back to shareholders can, over time, be significant.
Employing a strategy combining market growth and reinvested dividends can help you pursue your financial goals while potentially minimizing risk in your portfolio.
What Is a Dividend?
A dividend is a distribution of a corporation’s earnings to its shareholders, typically made on a quarterly basis. Dividends are paid on a per-share basis, so the more shares an investor owns, the greater the dividend he or she will receive.
A company’s dividend payout ratio is the percentage of earnings distributed to shareholders in the form of dividends and is calculated by dividing dividend per share by its earnings per share. The dividend payout ratio offers an indication of how well earnings support the dividend payments. More mature companies tend to have higher dividend payout ratios. Dividends are one indicator of a company’s health. By issuing a dividend, a company is exhibiting its healthy cash flow and signaling that it believes its growth is sustainable.
Who Issues Dividends?
Not all companies issue dividends. Companies that are experiencing rapid growth (growth stocks) generally do not pay dividends, instead choosing to plow their earnings back into their operations with the hopes of eventually rewarding investors through capital appreciation.
Dividend-issuing stocks typically offer less volatility than do growth stocks, because the dividends they pay are based on the company’s profitability, not market perceptions. In a bear market, this can be especially attractive, as dividend-paying companies may continue to provide a return while other growth-oriented stocks are declining.
Investors who receive dividends can do one of two things with the proceeds – take a cash payment or use the money to purchase more shares. Reinvesting allows investors to increase their position without providing additional capital, reducing the cost basis of the investment. Reinvesting also unlocks the power of compounding, a helpful way for investors to build wealth.
What to Look For
An investor should look for stocks that have a track record of consistently increasing their dividends. These are usually strong, stable companies that have self-imposed discipline to continue to perform well and earn a profit year in and year out.
Maintaining and increasing dividend payments requires consistent earnings growth. Looking at a company’s earnings growth over time can help you determine if it will consistently offer dividends in the future. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.
Dividend investing may be an especially good strategy for baby boomers to adopt for retirement income.
Contact Kim, Korey, or Tyler at Kletschke Wealth Management Group to discuss how dividend strategies might fit into your overall plan. Kletschke Wealth Management Group
700 4th Street, Suite 100
Sioux City, Iowa 51101
(712) 252-6931 [email protected]