Dividend stocks can be pretty boring. And it's not because they don't do exciting things. Longtime dividend payers do pursue growth in the normal ways, such as innovative research and development, acquisitions, or geographic expansion. But they tend to do these things in a more reserved style. Rather than plowing all available cash back into the business, they split those funds between shareholders and the growth opportunities they can pursue methodically.
It's no thrill ride for shareholders -- but then who says you need thrills to get rich? I'd argue the opposite, that too much excitement can actually lure you into investing decisions you might later regret. So, here's a look at seven reasons why dividend stocks, as boring as they can be, have a role to play in your investment portfolio.
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1. Two ways to earn
Your total return on your dividend stocks has two components, share price appreciation and that regular dividend payment. If a temporary circumstance -- say, a global pandemic -- is putting negative pressure on the share price, you can often still look forward to collecting your dividend as a consolation prize. And, even better, a depressed share price gives you the chance to scoop up more shares to lower your cost basis and increase your dividend yield on that position.
2. Passive income
Dividend stocks produce passive income. You don't have to do much of anything other than follow the companies you own. And if you choose dividend-paying businesses that interest you, your research can feel more like a hobby than a job.
3. Liquidity boost
Exchange-traded stocks are fairly liquid, but there's always the chance you'll need cash at a time when the market's down and you don't want to sell. Dividend stocks help in this regard, because they produce cash on their own, with no trading required. That's particularly appealing if you keep a lean cash balance, because you can use your dividends to top off your emergency fund when it's depleted. Or, if all is well, you can reinvest those dividends and get a higher payment next quarter.
4. Emotional benefits
Dividend stocks are easier to hold onto through a bear market, assuming you own companies that are committed to keeping their dividends intact. Many an investor has made the snap and counterproductive decision to sell good stocks in a downturn, hoping to minimize losses. But you're likely to resist selling off your dividend stocks -- since they're still producing cash for you. Heck, you might even buy more shares of your dividend payers if they're the only bright spot in your portfolio.
5. Lower volatility
That tendency for investors to hold onto dividend stocks through downturns contributes to lower share price volatility, too. Dividend stocks do rise and fall with the market, but these fluctuations can be less extreme versus their non-dividend-paying counterparts. That's because investors like certainty. The presence of a dividend provides slightly more certainty than no dividend at all -- particularly when the market is turbulent. Companies that pay dividends also tend to have relatively predictable cash flows and a disciplined approach generally. Those factors, too, become more attractive to investors during a downturn.
6. Experienced leadership
Companies with long track records of paying dividends often have seasoned leaders, with experience managing through all economic climates. That also contributes to lower downside risk and a smoother journey through tough times.
7. Higher yields than bonds
Current yields on five-year and 10-year Treasuries are less than 0.6% and 1.4%, respectively. On maturities shorter than one year, the yields are less than 0.1%. A quality dividend stock, though, might give you annual dividend income of 1.5% to 3.5% of the share price. To share a few examples, Walmart yields 1.5%, Procter & Gamble yields 2.5%, and 3M yields 3.3%. These are three companies that have been consistently paying dividends for 45 years or more.
Dividend-payers can bring some stability to your equity portfolio, encourage you to trade less, and deliver income at higher yields than government bonds. They may not be your most exciting growth prospects, but they will contribute to your wealth -- and possibly your emotional well-being -- through good times and bad.
