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Peak Performance

Assessing dividends is vital to stock market success

WILLIAM J. LYNOTT

Dividends are an extremely important part of equity investing because they can mean the difference between merely doing well and building true wealth. More than 40% of the stock market’s total annualized return of 9.9% since 1926 is attributable to dividends according to registered investment advisors Ibbotson Associates. In 2013, dividends paid by companies included in the S&P 500 index increased returns by more than 19%.

What are dividends?

When a publicly traded company earns a profit, it must decide what to do with that money. One option is to share the profits with investors by declaring a dividend payable on a quarterly basis.

A dividend yield is the percentage a stock yields in dividends per year. It can be calculated by dividing the total dividend paid per year by the stock price. As stock prices fluctuate, so will the dividend yield.

Obviously, the extra returns generated by high-dividend yields amount to a lot of money through time. That’s why dividends should be an important part of your approach to equity investment.

The power of dividends

Though dividends alone are only a part of a stock’s value as an investment, they must be taken into consideration when evaluating stock investments. It’s important to do your own research. Look for stocks that are fundamentally sound, generate positive cash flow and offer the possibility of higher prices and higher dividends in the future.

Shrewd dividend investors are well aware of the easy-to-overlook power of dividends:

• Dividends are real money, and a company cannot pay out money that it doesn’t have. Unfortunately, history has shown us that questionable accounting methods can be used to falsely increase the market price of a stock. But a dividend can’t be faked.

• Dividends offer some protection in a down market. As a stock price falls, the dividend yield effectively increases. This can result in a sort of floor in the stock price, which, in turn, can help to avoid panic selling and the resulting capital losses.

• They suggest a friendly attitude on the part of company executives toward shareholders. Once a company develops a record of dividend payments, management is reluctant to eliminate it.

• Dividends are often a clue into how management expects the future of the company to look.

Long-term success

Dividend investing is a strategy for investors, not traders. Long-term dividend investing can be an excellent choice if you are a conservative investor looking for a more stable investment strategy with excellent growth through the long term. OM

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.

MR. LYNOTT IS A FREELANCE WRITER WHO SPECIALIZES IN BUSINESS MANAGEMENT AS WELL AS PERSONAL AND BUSINESS FINANCE. VISIT WWW.BLYNOTT.COM, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.