Introduction
The dividend and its impact on total return should not be forgotten by novice or veteran investors. Strong long-term returns can be obtained in any market environment by investing in companies that consistently increase dividend payments. In general, dividend-paying companies have better balance sheets and greater quality management than their non-dividend-paying counterparts.
In addition to outperforming non-dividend paying equities over the long term, dividend stocks show lower volatility from year to year. Investors forget that dividends and price gains contribute to total return during bull markets. As a group, we think that investors are getting a good deal on today's market when purchasing shares of excellent companies.
Selecting Stocks With a Consistent Dividend Payout
Sometimes the companies with the highest dividends are the ones that people least expect to succeed. Apple (AAPL) is a firm on everyone's investing radar, unlike other flashy digital companies flirting with problems, such as LinkedIn, which was rescued by Microsoft Corp. (MSFT) in December 2016, and Twitter, which experienced a 2016 #superslump. It wasn't until 2012, five months after Steve Jobs' death, that dividend payments began. They were last distributed by the tech giant in 1995, nine years well before the release of the first MacBook Pro. 2 When selecting stocks for their dividend potential, keep in mind the following:
Stocks That Consistently Pay Dividends Are A Safe Bet For Profit
In finance, Johnson & Johnson (JNJ) is referred to as a "dividend aristocrat." The health care and pharmaceutical behemoth headquartered in New Jersey has grown since the 1970s. After only four years, not even Apple has kept its streak intact.
Earnings Increase and Spread
Market risk, or the danger inherent in any equity investment, is a fundamental concept in stock market investing. There is no assurance that the value of your stock portfolio will rise. While it's true that not all investments in dividend-paying companies will yield a profit, dividend stocks do provide an almost assured return on investment. Companies that have historically paid dividends rarely discontinue doing so, and the vast majority of those that do boost their dividend payments as time goes on.
Expenses Defore Dividends are Paid
The stock price drops on the ex-dividend date because of this. You must be a shareholder before the ex-dividend day to get the dividend. Before the ex-dividend date, stockholders can receive dividend payments on shares they own. If you purchase a share of stock sometime after the ex-dividend date, you will not be eligible to receive the dividend scheduled to be distributed soon. If you find this unfair, keep in mind that the share price drops to account for the dividend. Therefore, if you purchase the shares sometime after the ex-dividend day, you will not be eligible for the dividend, but you will pay a reduced price.
Overall Profit
Regardless of the state of the market, dividends should be paid. Dividends boost your overall return in any market environment. My customers discovered this the hard way when the market was flat. Even if stock prices aren't rising, your investment portfolio can still produce income through dividends. If you have your dividends automatically reinvested, you can buy more shares of stock at a discount while stock costs are low, which can increase your return more quickly if and when the market eventually rebounds.
Transparency
Those looking to put their money into something should have a firm grasp on the subject. A dividend is a tangible way for a company to communicate with its shareholders about the health and future of the company. A company can employ accounting tricks to massage its profit and loss accounts, but it can't cheat shareholders out of a dividend. Dividends must be distributed in hard currency.
Efficiency
Companies that pay dividends should be more disciplined if they want to maintain their current pattern of reliability. Better business decisions and higher-yielding investments are necessities for them. Executives are more likely to prioritise high-yielding projects and tighten their reins on wasteful capital spending when they are required to distribute their profits as dividends. Money that the executive board has promised to distribute as dividends are out of management's hands and hence cannot be mismanaged. How well those businesses do is a direct result of this.
Potentially Stronger Portfolios With Dividends
In our opinion, stocks that pay dividends are a viable substitute for low-yielding fixed-income investments and deserve a position in income-focused portfolios. Despite temporary declines caused by the epidemic, dividend payments have rebounded, and the compounding effect may eventually boost investment returns even further. In our opinion, a persistent market shift from growth to price would also be positive for dividend companies.
Conclusion
It is possible to infer the health of a firm from its dividend policy, as poorly run businesses typically cannot afford to pay dividends to their investors. In the United States, qualified dividends are taxed from 0% to 20%, far lower than the standard rate of income taxation. Dividend stocks have a track record of success, even during economic downturns. Between 1980 and 2019, dividends primarily contributed to S&P 500 performance.
