Are Dividend Heavy Stocks As Safe As You Think?
You’ll hear financial experts tell you, and deservedly so, that a safer way to potentially earn more on your investments is to invest in stocks that pay a substantial dividend. A dividend is money paid to shareholders coming from the company’s profits. Usually, higher paying dividend stocks tend to be financial companies or well established high cash companies. Some examples of these are Pfizer (PFE), General Motors (GM), and Verizon (VZ).
During the last couple months, more and more companies are becoming strapped for cash and are facing quarterly losses, although pressured by their shareholders as well to maintain their dividend paying reputation; these companies are finding it harder to maintain these payouts. The Washington Post recently reported that 17 of 20 financial companies in the S&P 500-stock index have cut their dividends so far this year, which they report as being more than in the past five years combined. This is an astonishing figure considering many investors use these stocks as safe zones in their portfolios.
Although these recent cuts in dividends is far from being an issue to put a lot of worry behind, it does make you wonder if companies have had unrealistic dividend yields for some time and are only now being exposed. Perhaps, some of these companies – especially financial – should have been paying less to their shareholders and been building up more capital, which in the long run actually makes them safer stock picks.
Don’t be scared off from dividend stocks, but I suggest picking companies with a long history of slowly rising dividends. With money markets yielding as low as 1.5 percent, even moderate yielding dividend stocks have proven to be good bets against a bear market. Keep these in your portfolio, but be wary of dividends that seem too good to be true – as we have learned during this recent downturn in the economy, they will show their true colors, which hasn’t been green. $
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Comments
@ Alisa: Long history of paying increasing dividends on a consistent basis? You and me both. The good news is that there are companies out there that fit that criteria, but the bad news is finding them and not having them be overly expensive when you are starting out. If you are just getting started I would set up a portfolio that is diversified and a little aggressive if you are young (not too aggressive though!) and set up a an automatic buying schedule and then forget about it for a while. Come back and look and see how you did and then readjust. There is a lot that goes into it: huge libraries of books for analysis and whole degrees in universities for learning how. Baby steps!
@ Ben: Makes sense not to pay more than the business is worth when trying to fing stocks that pay a consistent dividend. But I am learning that some “events” that impact an industry, a sector, and/or business could very well cause the price of one of these sought after jewels to decline in price.. even if only briefly.
That’s the time to pounce!
Be well Ben…
(By the way… if you run across one of these babies… let me know… and I’ll do the same … o.k.?)
I would like to find more companies to invest in that have a long history of paying increasing dividends on a consistent basis. Although dividends paid to a small investor like me is nothing to write home about. But in time these “small” dividends could increase in size to be a substantial amount of spending change.