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9 Reasons to Love High-Yield Dividend Stocks

By Reuben Gregg Brewer - May 20, 2016 at 3:21PM

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There's a lot to like about high-yield dividend stocks. Here are nine reasons why I love them

If you're like me, you have an affinity for shares of companies that pay dividends -- especially dividends with a little heft to them. There are many reasons why dividend investing is a good idea. Here are nine that top my list.

1. Give me my money

In theory, the money a company earns belongs to its shareholders. Many companies, however, don't act like this is the case (how many corporate jets does a company need, anyway?). But when a company pays a dividend -- particularly a sizable one -- it shows that management recognizes whose money it's playing with and gives shareholders their due respect.

That isn't always the case, of course. Sometimes a dividend is paid as a way to entice investors into a stock that otherwise doesn't have much appeal. But I'm loath to invest in a company that doesn't give me at least a little bit of the money that is rightfully mine. So as far as I'm concerned, dividend-paying stocks are pretty much the only game in town.

2. You can't fake a dividend

There's a funny thing about dividends: You can't fake them. It's cash out the door; it's either there or it isn't. And once you have a dividend in your pocket, a company can't take it back.

That's a lot different from earnings, which accounting rules make into a moving target. For example, non-cash charges like depreciation and murky issues like how a company chooses to recognize revenue, among many other arcane accounting practices, make it hard to trust the EPS figure. And then there are the all-too-frequent earnings restatements. I take a great deal of solace in having my cash in my hand.

Image Source: ExxonMobil

3. Dividend growth is a statement

That leads to my third favorite reason for loving high-yield dividend stocks -- dividend increases. There's an obvious reason I like dividend hikes -- after all, who doesn't want more money in their pocket? But more importantly, a dividend raise is a statement. A company like ExxonMobil (NYSE: XOM) doesn't achieve more than 30 consecutive years of annual dividend increases by accident. Every dividend hike is a testament to just how well run the company is and how much management believes in the future of the company it's entrusted to run.

But right now, with so many oil companies struggling, you can see the difference between Exxon and its peers. For example, Chevron (NYSE: CVX), with around 28 years of annual dividend increases, hasn't upped its dividend in eight quarters. Its streak is at risk. Other peers have actually cut their disbursements. Meanwhile, Exxon raised its dividend again in the second quarter. Which company do you think is feeling more secure about its future?

4. Dividends can hint at good buys

Dividend yield can help you find good investment opportunities. A dividend yield changes as the stock price moves up and down and dividend payments change. But generally speaking, stocks trade within a historical yield range that can serve as an indicator of when a stock is cheap or expensive.

XOM Dividend Yield (TTM) Chart

XOM Dividend Yield (TTM) data by YCharts.

Exxon is a great example here, too. If you look at the chart above, you can see that there was a time when the stock regularly yielded north of 4%. But since the mid-1990s, the yield has been much lower. So when the yield spiked past 4% last year due to a slump in the oil industry, that signaled an unusually appealing buying opportunity. Investors like me quickly stepped in, and the yield hasn't been that high since. If you're looking for it, you'll find this scenario plays out time and time again in every sector of the market.

5. Getting paid to stick around

All that said, when a company is sporting an unusually high yield, then it's probably facing some headwinds. Case in point, Exxon is dealing with low oil and natural-gas prices. There's no way to sugarcoat this fact. However, that steady and rising dividend gives me a pretty good reason to wait the hard times out.

A regular dividend check helps smooth out the bumpy returns of volatile stocks. And that's not only true when times are tough; it also helps me stick around when times are good -- perhaps too good. In other words, by focusing on the dividend and not the stock price, I limit the emotional impact of stock price moves. That, in turn, helps me resist the urge to time the market -- an investment mistake that can cost investors a lot money and peace of mind.

6. Part of the way there

One thing I always remind myself of while I'm sitting pat with my high-yield dividend stocks is that every dividend payment gets me closer to my "expected" return. You might have a different figure than me, but stocks have historically returned something around 10% a year. If you're getting 4%, 5%, or 6% through a dividend, then you don't have to worry so much about what the market does in any given year.

Indeed, if you have a 6% yield, then the stock only has to go up 4% to bring you to an annualized return of 10%. And because the dividend helps to mitigate poor stock performance during tough times, you can stay invested in the company until the fickle market rebounds and offers investors double- or triple-digit gains.

A couple of caveats to all of this: Dividend-paying stocks tend to be mature and slow-growing, and if a company doesn't have the financial strength to continue paying a dividend through thick and thin, then that payout could be reduced or eliminated. That's why it's best to look for stocks with a long history of regular, sustainable dividends.

7. Dividend reinvestment

If you don't need the cash that's being thrown off by your high-yield stock, then you can reinvest the dividends in more shares. This is a powerful way to accelerate your compound growth.

Think of it this way. Mr. Market vacillates between euphoria and depression. We all know that dollar-cost averaging can remove the urge to time these wild swings. But dividend reinvestment goes one step further. It basically puts you on autopilot: Your share count grows, and you don't have to add another cent to the pot. As your stake in the company grows, so does your dividend -- and thus your dividend reinvestments. This creates a virtuous cycle of accelerating capital gains.

8. Something to live on

Of course, you may want to use those dividends for current spending. That's perfectly fine. If you're retired, your dividend payments can help replace your paycheck and help you avoid eating into your savings too much.

There's a long-running debate about how much money you can pull from your retirement saving each without running out of money. One commonly accepted figure is 4%. Well, if your retirement portfolio pays out 4% in dividends, then your capital can stay invested, and you'll still have your spending money. That's a win-win in my book. And it can definitely help you sleep better at night when the market is heading lower.

XOM Chart

XOM data by YCharts.

9. Dividend growth is like a raise

If you're spending your dividends, then you'll be particularly fond of dividend hikes. (I told you I'd get back to this one.) In this case, dividend increases not only signal that a company has a bright future, but also help your income stream keep up with inflation -- much like the cost-of-living raises you got when you were working.

And yes, even high-yielding stock increase their dividends, though the raises are likely to be smaller. That's a good reason to have a mix of higher- and lower-yielding stocks in your portfolio.

Yeah, I'm a dividend fanboy

I won't even try to sound cool and collected. I really do love high-yield dividend stocks. They form the backbone of my portfolio. And while I don't need the dividends to pay for my daily living yet, I look forward to the day when I can turn that income stream on. Dividends stocks aren't perfect, and you still need to do your homework to make sure you know what you own, but they can help you achieve your financial dreams if you know how to use them. And after reading this list, you should have at least one good reason to love dividend stocks, too.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$85.64 (-2.81%) $-2.48
Chevron Corporation Stock Quote
Chevron Corporation
$144.78 (-1.50%) $-2.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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