September 13, 2022
Dividend stocks have recently become popular on Wall Street, with some investing in them in search of income to combat inflation or as a buffer against market volatility. In the second quarter of 2022, dividend payouts set a record despite economic slowdown, inflation, and rising interest rates, and some expect this trend to continue through Q3 and 2023. That’s good news when other investments, such as growth-oriented stocks and bonds have faced volatility and a decline due to the events of this year.
There are several questions investors often have regarding dividend stocks. First, what is a dividend? A dividend is a portion of a company’s earnings that it regularly distributes to shareholders, either as cash or as additional shares of company stock. Not all companies choose to distribute profits in the form of dividends, others reinvest their profits back into their organizations. Dividends are also not guaranteed. The board of a publicly traded company chooses whether to distribute a dividend, the amount, and how to schedule their distributions.
Another common question is how to choose which companies to invest in when it comes to dividend-paying companies? A common metric is dividend yield, or the annual dividend amount divided by the share price. This measures how much income as a percentage of their investment a stockholder will receive. However, seeking the highest yield is not always the best indicator, sometimes it can be the result of a falling stock price. Above all, ensuring a company has a strong balance sheet can indicate the company will be able to maintain, and even grow, its dividend payments over time.
Finally, how can you invest in dividend-paying companies? You can buy individual stocks, or you can choose a dividend-focused mutual fund or exchange-traded fund. A fund can provide diversification at a lower price point. As well, once you have invested in a dividend focused group of individual stocks or a dividend fund, you can also re-invest your dividends and purchase further shares for growth over time.
Any investment decision depends on the specifics of your financial situation. For help with understanding how dividend stocks can be a part of your investing journey, feel free to reach out with any questions.