The Benefits of Investing for Dividends
Investing for dividends can be an effective strategy for those seeking relative stability and income in their portfolios.
The stock market involves risk, but companies that pay regular dividends have often provided less volatile returns. Also, retirees and other investors who are dependent on income may be finding it harder to come by these days. When bonds aren’t providing much in returns, investors willing to accept more risk might want to add more dividend-paying equities to their portfolios. That’s when dividends can really make a difference.
Companies can choose to pass profits on to shareholders in the form of dividends. The largest, most established companies don’t necessarily need to reinvest profits for growth, so they tend to pay regular dividends as a way to return earnings to their investors. Mutual funds with an equity-income, growth-and-income or balanced objective may hold shares in those dividend-paying companies. When a fund pays dividends, investors could take them in cash, providing a source of income, or they could reinvest those dividends which, when compounded may help build wealth over the long term.
There are many reasons to invest in mutual funds with holdings in companies that pay regular dividends:
- Dividends are a good indicator of a company’s strength. The balance sheet and shareholders’ confidence in the company are factors in how investors value its stock. While stock prices can indicate investors’ perception of a company’s value, dividends are based on a company’s actual operations and available cash.
- Dividends can provide a cushion during stock market declines. Investments that pay income have tended to be more stable than investments focused on growth of capital, helping to balance risk and return.
- Retirees can take dividends as income, rather than withdrawing from their principal account value. The key is for dividend income to exceed withdrawals, which could keep their nest egg intact.
- When share prices are growing slowly or not at all, companies that pay dividends could provide an investor’s only return.