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4 Reasons to Love Dividend Stocks

By Daniel Sparks - May 17, 2016 at 4:21PM

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Here's why some investors swear by dividend-paying investments.

Dividend stocks could very well be the most underappreciated assets on the planet. Some investors, of course, both fully understand them and bask in their wealth-building abilities. But a handful of the population is completely unaware of what makes them so great. Here are the top four reasons to love dividend stocks, using Apple (AAPL 1.30%) as an example.

1. They provide an income stream.

A dividend stock is ultimately a company that is producing excess cash that management doesn't plan to invest back into its business. This means this excess cash goes to shareholders -- usually on a quarterly basis. Dividends, therefore, provide a consistent stream of income, making them popular investments for individuals either approaching retirement, or already in retirement.

Consider Apple. The tech giant pays out $0.57 per share to investors every quarter, or $2.28 per share annually. With shares trading at $94 at the time of this writing, the company is paying out a dividend equal to 2.4% of its share price every year. This metric is called dividend yield, and it represents the stream of cash dividend stocks pay out to shareholders as a percentage of each share owned.

2. This income stream usually grows.

A 2.4% dividend yield is already better than the annual interest that can be earned in savings accounts, and it even beats many CDs, or certificates of deposits. But it gets better: Apple has promised to increase its dividend on an annual basis, so this stream of income will actually grow over time.

Since Apple initiated its dividend in 2012, its quarterly dividend has increased 50%, from $0.38 to $0.57.

Many dividend stocks have regular dividends that have consistently increased annually for years -- even decades.

3. Principal can grow, too.

Beyond a consistent income stream from dividends, the principal per share can increase, too. For instance, the per share value of Apple stock is up 60% since the beginning of 2012; during this same period, Apple initiated a quarterly dividend and boosted it by about 50%.

4. They're low maintenance.

For investors who strictly buy stocks that don't pay dividends, ultimately the goal is to sell at a higher price than the original purchase price. This adds an extra layer of work. Dividend stock or not, investors need to assess the investment quality of the stock; but a regular dividend means investors need to worry less about the timing of selling their investment in the future, as dividend stock owners are rewarded with a cash stream even without taking any action.

Of course, dividends come in many shapes and sizes. Some dividend yields are much higher than Apple's, but historically grow at very low rates -- or not at all. Other dividend yields are lower than Apple's, but grow faster. Then, of course, there are companies with very unreliable and unpredictable dividends, usually evident by an inconsistent track record of dividend payouts.

And it's also worth noting that even dividends paid by large, dependable companies can occasionally go awry. The risk of losing principal, or the risk of a consistent dividend coming to an end, are realities income investors face -- similar to risks investors in stocks without dividends face. So it's usually best that these dividend stocks are owned as part of a diversified portfolio of investment-worthy dividend stocks.

Investments can't get much better than a growing stream of cash produced from a low-maintenance portfolio of solid dividend stocks that will likely see principal appreciation over the long haul, too. If you're not already exploring these assets, now is a good time to start.

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