A dividend is the payment that a company distributes to its shareholders as a percent of earnings. Management can decide whether to pay a dividend, how much it is, and the frequency of payments. Dividends are often distributed quarterly and are quoted as the amount of dividend per share. Companies that issue such payments are called dividend paying stocks and are attractive for investors seeking income in addition to capital appreciation.
The monetary environment is still highly favorable to stocks and should continue to be so well into 2015. However, while this market can handle higher interest rates, stocks can only advance in a higher interest rate environment if gross domestic product (GDP) growth is there to back it up.
Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high. Accordingly, it’s worthwhile reviewing your exposure to risk, particularly regarding any highflyers in your portfolio; they get hit the hardest when a shock happens.
Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.
The risk of stocks selling off on the Federal Reserve’s actions is diminishing. The marketplace is well informed about the central bank’s intentions and it’s quite clear that Fed Chair Janet Yellen doesn’t want to do anything to “surprise” Wall Street.
I still view this market as one where institutional investors want to own the safest names. The economic data just isn’t strong enough for traditional mutual funds and pensions to be speculating.
This is why the Dow Jones Industrial Average and other large-cap dividend paying stocks are so well positioned. They offer great prospects for increasing quarterly income, some capital gain potential (still), and downside protection compared to the rest of the market.
Of course, all stocks are risky. An equity security is priced in a secondary market where fear, greed, emotions, and a herd mentality are part of the daily pricing mechanism.
Accordingly, anything … Read More
As a strong believer in the wealth-creating effects of large-cap, dividend paying stocks, I’m also an advocate of dividend reinvestment, which is the purchasing of a company’s shares using the cash dividends paid.
This can be done commission-free from your broker and/or through the company itself if it offers such a program.
Dividend reinvestment is a powerful wealth creator if you do not require the income paid out by a corporation. It is a great way to invest and to grow your money over the long-term.
As the timespan increases, the percentage return produced by the S&P 500 becomes weighted to dividends. It’s kind of old school, but the numbers add up. Even over a few short years of good broader market performance, total investment returns can increase substantially over simple capital gains.
For example, if you bought shares in Intel Corporation (INTC) at the beginning of 2010, that stock would have produced a capital gain to date of approximately 50%.
But if you reinvested the dividends paid by Intel into new shares each quarter, your total investment return, including dividends and new shares, jumps to approximately 75%, which is a very big difference!
In the utility sector, Duke Energy Corporation (DUK) increased on the stock market about 30% over the last three years. But by reinvesting the company’s dividends into new shares during that same time period, your total return could have climbed to around 49%. Again, this is a material improvement.
Of course, dividend reinvestment excludes the potential returns to be had with the income being applied to other potential assets.
But the process is so easy, and … Read More
My dad is earning a few percentage points on his fixed-income yields. Fortunately for him, that’s sufficient to live on when combined with his monthly pension and savings. He has no mortgage and lives a pretty normal, but somewhat frugal life.
In fact, Dad has always favored the fixed-income market for his investments as he doesn’t like risk. But for many Americans, the need for an ample flow of income during your retirement is a necessity for surviving, especially if the Great Recession wiped out your 401(k).
With the 10-year bond yield languishing below three percent, it would be difficult to live on this income, unless you have sufficient bond holdings or other avenues of income, like my dad’s pension. Having a more frugal or cost-conscious lifestyle also helps for many in retirement.
Yet the one area that I feel has been extremely positive for investors over the past five years is the dividend paying stocks that provide far higher yields and preferred tax treatment versus bonds. My dad may not be open to dividend paying stocks, but it makes sense for many other investors.
In reality, the Dow Jones and dividend paying stocks have returned some impressive capital gains and income over the past years. I expect this to continue in the current investment climate, where the stock market is favoring less risk.
Take a look at the Dow Jones Industrial Average (DJIA), which is slightly in positive territory, but at the same time, laying out income via dividend paying stocks.
The income stream has also been inviting with the average dividend yield on the 30 Dow blue-chip dividend … Read More
After some bouts of selling in May, the stock market appears to be edging higher again as we are at the end of the trading month today.
As I said in January, it will not be easy to make money this year, given the cuts in easy money flowing into the capital markets. The S&P 500 is leading the pack with a 3.46% gain as of Tuesday. If you annualized the five-month return, the advance comes out at 8.3%. I expected to see the index advance about 10% to as much as 15% this year, so we may be lucky to reach the lower estimate if the stock market can manage to move higher. (Read about some dividend-paying stocks to boost your returns in “Five Dividend-Paying Stocks for When the Market Slides Lower.”)
Growth stocks, which were the Wall Street stars in 2013, are now the dogs of Wall Street, as investors shift their capital into lower-risk big-cap stocks. The NASDAQ is up a mere 1.45% this year, while the small-cap Russell 2000 is languishing with a 1.86% decline.
Now keep in mind that we are currently in the worst six-month period for the stock market from May to October, based on historical tendencies.
This doesn’t mean there’s no hope for the stock market going forward, but again, it won’t be easy. May is looking to produce a positive advance, so there’s some optimism.
What I think will likely continue to happen is the stock market will tread cautiously in the absence of any fresh new catalyst to entice investors to buy in.
We are entering into the … Read More
The thing about large-cap investing—and most stock market investing, in general—is that periods of capital gains are often met with long periods of non-performance.
A great investment with a long history of making money for stockholders is Johnson & Johnson (JNJ). But even this blue chip pharmaceutical/consumer products company has experienced long periods with nearly no capital gains (1975 to 1985 and 2002 to 2012, in recent history).
Action in the broader market is a big reason for non-performance of individual companies. The Procter & Gamble Company (PG) acted similarly on the stock market during the same period.
Back in 2000, the company had a quarterly earnings miss during the height of the technology bubble. The position was cut in half and took five full years just to recover.
That stock market experience is a good reminder that even so-called “widow” and “orphan” blue chip stocks are susceptible to major share price volatility and non-performance. (See “Blue Chip Stocks Expensive at This Point.”)
And depending on your time horizon for investment, the market cycle has a tremendous influence on total equity returns.
It also illustrates that investment risk with stocks, even the most stable of businesses, will always be inherently high due to the fact that prices are determined by a secondary market system (i.e. non-private ownership).
Therefore, given the perpetual cycle of volatility and only relative pricing of stocks at any given time, one of the single most important factors influencing total equity market returns is dividends. And their importance and percentage weight comprising total market returns grows significantly with duration.
Also illustrative in the stock market’s … Read More
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