Why You Should Consider Dividends

Investors often ask: "What are the advantages of a dividend stock?"

Senior analyst Anand Chokkavelu (who has given his thoughts on the subject here) sat down with James Early, lead advisor of The Motley Fool's dividend investing service, Income Investor, to discuss the question.

James pointed to potentially lower risk and increased flexibility as two reasons to think about dividend stocks. Specifically, cash dividends take money out of management's hands and put it into yours to reinvest as you see fit.

He does caution investors to take into account the tax effect of dividends and to beware of dividends that seem too good to be true (yields above 8% are especially suspect).

When asked to name a couple of quality companies that he's waiting for higher yields on, he pointed to Wal-Mart (NYSE: WMT  ) (yielding 2.3%) and McDonald's (NYSE: MCD  ) (yielding 3.1%).

Watch the video here:

James Early doesn't own shares in any of the companies mentioned. Anand Chokkavelu owns shares in McDonald's. Wal-Mart Stores is a Motley Fool Inside Value recommendation. The Motley Fool's disclosure policy gets camera-shy.

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  • Report this Comment On June 21, 2010, at 9:05 PM, busterbuddy wrote:

    the important of Dividend is rarely measured. When you review a chart you just see the price point changes and get a yield. But the compound impacts of dividend reinvesting is just the best investment ever.

    Take the CNBC guys comments about Gold. Well Gold doesn't pay a dividend is there song. But hey neither does Apple. The point is Gold and Apple's stock value is paper iilusion. And one is assuming when one purchases either than the price of the stock will increase. But the truth is the price of the stock will both increase and decrease over time. And price increases are not asset builder.

    One the other hand dividends reinvested are asset builders and are not paper illusions.

    The real question is why would anyone purchase stocks that don't pay a dividend?

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