Investors value dividend stocks because of myriad reasons. For one, they significantly increase stock investing profits. They also are better at reducing stock market risks, while also providing an extra metric for company analysis. Read on to learn more about the importance of dividend stocks.
Growth and Expansion of Returns
Perhaps the biggest benefit of investing dividend paying stocks is that dividends usually grow over time, Well-known companies that pay dividends almost always increase their dividend payouts every year. For instance, the dividend average compounded annual growth rate for S&P 500 companies that offer dividends has been 3.2 percent since 1980.
Dividends and market risks
Stock market investing is incomplete without some amount of market risk, or the inherent risk linked to any kind of equity investment. Stocks will go up and down, and there isn’t any guarantee that they will increase in value.
However, even though investing in dividend-paying companies is not certain to be profitable, dividend stocks offer at least a partial return on investment that is practically guaranteed. It’s quite rare for dividend stocks to ever stop paying dividends. More importantly, most of these companies increase their dividends over time.
Additionally, the inclusion of the dividend payment has roughly doubled the returns on investments by stock investors when compared to what they would have gotten without dividend payments.
Further, against a low-interest rate backdrop, the dividend yield offered by dividend-paying companies is significantly higher than the rates available to investors in most fixed-income investments like government bonds.
Dividends also provide a helpful point of analysis in equity valuation and stock selection. Evaluation of stocks using dividends is usually a more reliable equity evaluation measure than many other usual gauges such as the P/E ratio.
Most financial metrics that analysts and investors use in stock analysis are dependent on figures obtained from companies’ financial statements. The potential problem with evaluating stocks solely based on a company’s financial statements is companies can sometimes manipulate their statement s through accounting practices. They do such manipulations to improve their images to investors.
Meanwhile, dividends provide a solid indication of whether a company is performing well. In other words, a company that pays dividends usually has real solid cash flow.
Minimized Risk and Volatility
Dividends play a crucial role in minimizing overall portfolio risk and volatility. For risk reduction, dividend payments mitigate any losses that happen from a decline in stock price.
Apart from that, studies have also suggested that dividend paying stocks have outperformed non-dividend paying ones during bear markets. Even though a generally bearish market drags down stocks across all sectors and industries, dividend paying stocks suffer less than those that don’t issue dividends.
Dividends are also very tax efficient. Qualified dividends are taxed at significantly lower rates than ordinary income. According to IRS regulations, for individuals whose ordinary income tax rate is 25percent or higher, qualified dividends are taxed at only a 15 percent rate.
Meanwhile, for individuals whose ordinary income tax rate is below 25 percent, qualified dividends are completely tax free.