Based on current economic forecasts, we could be entering a period when market returns lag behind historical returns, meaning investors might want to do due diligence on all investment strategies to find the best way to meet their objectives. If income is a goal, dividend-paying stocks could be worth a closer look.
Investors sometimes overlook the potential value of dividend stocks—in part because these investments can sometimes seem boring compared with their high-growth counterparts.
But many individuals can benefit from these stocks. If dividends are automatically reinvested, investors have the opportunity to buy additional shares at lower prices during a down or flat market. This can be especially beneficial for retirees who aren’t contributing new money to their portfolios, as it still allows them to get the benefits of dollar-cost averaging.
A dividend-focused portfolio also is likely to have a higher yield than a growth-oriented portfolio. So even if a portfolio doesn’t experience any capital appreciation, investors would still benefit from the dividend yield.
One way to get exposure to dividend-paying stocks at a fairly low cost is through exchange-traded funds. Investors also can create diversified portfolios themselves, which would allow them to avoid internal ETF fees and tailor choices to their own objectives.
Investors should be aware of the tax implications of whatever strategy they choose. In a taxable account, dividends may be either qualified or nonqualified. Qualified dividends will be taxed at the capital-gains rate, while nonqualified dividends will be taxed at the investor’s ordinary-income tax rate.
This article was featured in the Wall Street Journal on September 11, 2016. https://www.wsj.com/articles/why-investors-should-consider-dividend-paying-stocks-1473645601