In the eyes of many people, dividend-paying stocks have an unfortunate stereotype as boring stocks that pay out modest income to retirees. That's far, far from reality, though, because dividend stocks can be surprisingly powerful wealth builders -- for several reasons.
For one thing, they offer the chance of a solid one-two punch: Stock-price appreciation over time along with regular cash payments along the way. Here are three more reasons to consider dividend payers.
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1. Dividends are fairly reliable
For starters, dividends are rather reliable. It's not 100% guaranteed that a dividend-paying stock will keep paying out its dividend forever, but you can rest assured that most managements will try very hard to avoid ever having to reduce, suspend, or eliminate a dividend -- because that will upset their shareholders and will not look good to potential shareholders, either.
Thus, dividend-paying stocks tend to be tied to companies that grown into a certain level of stability, with sufficiently predictable cash flow that can be expected to fund dividends far into the future. That's why you don't typically see young or fast-growing companies paying much, if anything, in dividends -- because they likely need every dollar of profit to fund further growth. When a company grows larger and perhaps has more cash coming in than it needs to spend on growth or paying down debt or other things, it will consider initiating a dividend.
But sometimes, though, despite best intentions, a dividend can be reduced or stopped. That's not the end of the world, though, for investors in these companies. Depending on the trouble a company is facing, investors may choose to hang on -- the dividend may be reinstated or increased eventually -- or may sell and move their money elsewhere.
Most of the time, though, dividends will arrive like clockwork, whether the economy is booming or ailing. And that cash infusion can be used to buy more shares of stock or to help support retirees.
2. Dividends tend to be increased over time
Better still, healthy and growing dividend-paying companies tend to increase their payouts over time. Imagine, for example, that you have a $400,000 portfolio of stocks with an overall average dividend yield of 3%. That should kick out a whopping $12,000 in dividends over the course of a year.
Let's also assume that the payouts average annual growth of, say, 7%. If so, then in your second year, you might receive around $12,840, and in your third year, $13,739. Indeed, over just a decade, your total dividends may have grown to $24,000. In retirement, that would come to about $2,000 per month -- more than the average monthly Social Security benefit!
3. Dividends aren't just for boring old companies
Finally, don't think of dividend-paying companies as boring. Yes, a paint company such as Sherwin-Williams (SHW -2.19%) pays a dividend, recently yielding nearly 1%. But it's not as boring as you might expect -- over the past 10 years, it has averaged annual growth of nearly 22%, without even counting dividends.
Plenty of more dynamic companies pay dividends, too. The table below offers a bunch of examples. Don't get put off by a seemingly small yield, as it might be growing quickly.
|
Stock |
Recent Dividend Yield |
Five-Year Avg. Annual Dividend Growth Rate |
|---|---|---|
|
AbbVie |
3.8% |
17.1% |
|
Apple |
0.6% |
9.1% |
|
Cisco Systems |
2.8% |
7.3% |
|
Costco |
0.6% |
11.9% |
|
IBM |
5.3% |
3.2% |
|
Lowe's |
1.4% |
18% |
|
Microsoft |
0.9% |
9.7% |
|
Pfizer |
3.2% |
4.6% |
|
Starbucks |
2.4% |
14.4% |
|
Target |
1.7% |
8.5% |
Data source: Yahoo! Financial and author calculations.
So don't rule dividend-paying stocks out when you're looking at contenders for berths in your portfolio. Know that they can help you amass a lot of money for retirement -- and they can kick out a lot of income that you can use to buy more stocks, too.
