COMPANIES THAT PAY DIVIDENDS CAN PROVIDE A GREAT SOURCE OF INCOME, BUT DO YOUR HOMEWORK BEFORE YOU BUY

By Craig Erwin, Ph.D.

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A September 8, 2023 article in Barron’s claimed that companies paying high dividends are attractive and that investors should consider owning them. Some companies share a portion of their profits with shareholders by sending them dividend checks. Although buying the stock of companies that pay hefty dividends (some more than 10% of the stock price) may be a good idea, buying stocks based solely on dividends is unwise. Plus, buying stock in a company that pays extremely high dividends can be very risky. Companies paying very high dividends may have serious problems and be desperate to attract investors. A high dividend may indicate that a company is a very risky investment. So, never buy stock solely based on dividends; be sure the company is sound and likely to keep making plenty of money.

There is a reason that so many articles recommend stock of companies that pay hefty dividends or have strong dividend growth. Dividends can be very helpful in growing a portfolio. Reinvesting dividends in stock results in compounding, which can be very lucrative. Market scholars like Jeremy Siegel, at the Wharton School of Business, have found that dividend paying stocks can be great investments.

The great thing about owning dividend paying stocks is that you may get paid twice; you get a dividend check every quarter plus you may profit when you sell stock.

Should you base your buying decision strictly on dividends or dividend growth? No. Sometimes companies pay hefty dividends to attract investors because they have serious problems and may even be struggling to survive. They may be forced to cut unsustainable dividends.

Although you don’t have to be retired to benefit from dividend paying stocks, such stocks are attractive to retirees who want income from a source other than a job. Owning a great deal of stock in dividend paying companies can produce a lot of income.

So, consider buying dividend paying stocks, but stick to healthy companies, healthy so they can continue paying hefty dividends.

Would you consider buying stock in a company paying dividends? Why?

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