Should I Invest In Dividend Stocks Now?



“With anxiety about the market running high and yields on bonds and CDs exceedingly low, dividend-paying stocks and funds have become the darlings of savers.” Walter Updegrave, Money Magazine, October 2012

 

dividend investing google image

Asset bubbles are a long term economic reality, dating back to the tulip bulb mania centuries ago. At the end of last century, the new normal was “technology stocks cannot fail.” Then there was the real estate mania in the middle of last decade. You were considered un-American if you didn’t buy a home. After all, low interest rates along with easy access to cash made buying a home as easy as buying a car.

Where do Dividends Come From?

When a company has profits, they have several choices regarding those profits.

1. The company can pay the cash to the investor in the form of dividends. Then the investor can spend that money in any way he chooses. That option leaves the company with no funds to reinvest in the growth of the company. If the firm doesn’t reinvest in their growth, the company will not prosper.

2. The corporation can take all of their profits and reinvest them in growth opportunities and acquisitions. If the company invests its capital wisely, the company will grow and it’s stock price increase. This benefits the stockholder with higher value. When the investor sells this growing company, she receives the benefit by receiving a higher price for her stock. This profit is called a capital gain.

3. The company can combine options 1 and 2. The company can take part of its profits and give them back to the investor in the form of a dividend and reinvest the rest in the growth of the company.

So you see, whether a company pays a dividend or not has little to do with your long term return. You either receive the company profit along the way as a dividend, at the end of your holding period, as a capital gain, or a little of both. The important point for investors is to invest in growing companies while paying a fair price.

The only difference between dividends and capital gains is in the timing of payments and tax treatment.

Advice for Investors

Invest in stocks and funds that are fairly valued with good growth prospects. If the company is profitable and growing, the investor benefits either through dividends or capital gains. Check out the free, How to Invest and Outperform Most Mutual Fund Managers ($9.99 value) to learn more about investing.

Are Dividend Stocks Headed for a Fall?

Whenever an opportunity is touted as “can’t miss”, look very carefully before you leap. Every investment has risk and the job of the investor is to understand that risk and invest accordingly. The response to the question, “Should I invest in dividend stocks now?” is quite simple, it depends. If the stock is fairly priced and has good growth prospects consider investing. But high dividends do not automatically equal a good investment.

Can’t Get Enough Dividend Stock Investing?

Have you invested in dividend paying stocks or funds? How are you making your money grow?

 image credit; google images from investment truth

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19 Responses to Should I Invest In Dividend Stocks Now?
  1. Veronica @ Pelican on Money
    October 1, 2012 | 12:28 pm

    Barb, great explanation of dividends and a nice roundup of dividend related posts! Don’t you need to invest quite a bit of money for decent dividend yields?

  2. Barb
    October 1, 2012 | 12:40 pm

    @Veronica-That was an excellent question. If a company is paying a 2% dividend on it’s stock and you invest $1,000, then your dividend payment for one year will be $20. The key to wealth building is to start saving and investing early and continue increasing the amount over time. Investing is not a get rich quick scheme, it’s a build wealth slowly endeavor.

  3. Julie @ The Family CEO
    October 1, 2012 | 2:16 pm

    Great overview, Barb. I’m a fan of dividend investing, as you know. Your point about ‘high dividends do not automatically equal a good investment” is a good one. I look for companies that continually increase their dividends (i.e. the Dividend Artistocrats) over those that have the highest dividends.

  4. Barb
    October 1, 2012 | 2:35 pm

    @Julie, Keep us posted on your dividend results. Even if dividends are increasing, you need to make sure that the stock is not selling at an inflated valuation.

  5. Brent Pittman
    October 1, 2012 | 6:33 pm

    I believe some low 400ish companies on the S&P 500 pay dividends. Possibly another reason for S&P index?
    I own 1 single stock that pays near 3% yield, those extra 4 checks each year are nice. I also have 10% reinvested, so each dividend check grows with time.

  6. krantcents
    October 1, 2012 | 6:44 pm

    Your timing is impeccable! I was thinking of adding to my dividend fund. I think I will dollar cost average into it.

  7. Lance @ Money Life and More
    October 1, 2012 | 7:48 pm

    I’m worried about dividend stocks too. In fact I already wrote up a piece going live on Wednesday about the two big problems I see with dividend stocks today! I’m totally worried about a bubble when everyone is saying invest in them. After all, weren’t we all supposed to buy houses 5 years ago?

  8. Roger Wohlner
    October 1, 2012 | 9:29 pm

    Barb good explanation of this issue. I typically don’t invest in individual stocks for my clients, but I have started to use an ETF that invests in companies with increasing dividends over at least the past ten years for some clients. I like the idea of a portfolio of blue chip stocks, the idea of the increasing dividends is that this is one measure of financial strength. The ETF will typically under perform in a strong up market, but over time provides nice price appreciation and a more “even” ride than say an S&P 500 fund. Current income is not the goal here.

  9. Cherleen @ My Personal Finance Journey
    October 1, 2012 | 10:46 pm

    I must admit that this is my go-to blog whenever I need to read and learn something about stocks and investments. This is another very informative post. Thanks for sharing!

  10. Shilpan
    October 1, 2012 | 10:56 pm

    Barbara, I love dividend stock investing. I normally invest in fortune 100 companies such as GE, JNJ, MCD, KO & AAPL. I also reinvest my dividend income.

  11. Barb
    October 1, 2012 | 11:37 pm

    @Brent, Probably a good idea to make sure you have some diversification in your portfolio in case the price of one holding goes south. I’m a big fan of reinvesting your dividends.
    @KRantc-Glad I’m on target once in awhile.:)
    @Roger, Sounds like a good diversifier for a portfolio.
    @Cherlene-Glad to be helpful, I really am quite passionate about the opportunity to build wealth through sensible investing.
    @Shilpan-As I mentioned before, I think reinvesting one’s dividends is a good approach to compound your wealth.

  12. CF
    October 2, 2012 | 2:49 pm

    That was a good overview of dividends! For us, we own a mix of dividend stocks, mutual funds and real estate. Hopefully they will not all tank. :S

  13. AverageJoe
    October 2, 2012 | 3:27 pm

    Clearly dividend stocks are overplayed by some on the internet. While a dividend can provide consistent earnings to your bottom line, the fact that dividends are taxable means that investors should watch where they own these stocks. We’d often move dividend payers to an IRA and hold non-dividends in non-IRA accounts.

  14. Barb
    October 2, 2012 | 3:56 pm

    @CF, Diversification is the one true tool to keep the volatility of your investments to a minimum.
    @Joe, Thanks for bringing up the idea of tax treatment of dividends. It’s helpful, to preserve the dividends to keep them in a tax advantaged account, unless you plan on spending the income.

  15. Jamie
    October 3, 2012 | 5:42 pm

    Thank you for explaining this. I never really thought about how or why a company would pay a dividend. I own a dividend fund, and I really like that it goes up a little bit more than the market because of the dividend investments.

  16. Barb
    October 4, 2012 | 10:28 am

    @Jamie, I’m glad that the information is helping you understand your investments. Feel free to ping me with any additional questions.

  17. Jennifer Lynn @ Broke-Ass Mommy
    October 9, 2012 | 9:39 am

    Barb, does one need a substantial amount of starting capital to begin investing in solid, blue-chip dividend-yielding stocks?

  18. Barb
    October 9, 2012 | 11:00 am

    Jennifer, I’m so glad you asked that question. At Charles Schwab Discount Brokers you can open an account with a low minimumdollar. If you don’t have a lot to invest, I would consider a dividend mutual fund. But before investing at all, please read my free eBook, 20 Minute Guide to Investing.

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