If you're interested in dividend-paying investments, good for you! Healthy dividend-paying companies can offer a bit of a cushion during market downturns. If the market heads south for a while, at least you'll keep receiving your dividends. (Of course a legitimate contrary take is that by eschewing dividend payers for non-dividend-paying fast-growers, you may end up making more money -- check out our Rule Breaker newsletter for some suggested stocks.)
Still, dividends have their place in many, if not most, portfolios. But don't just look for companies that are paying hefty dividends today. Here are two reasons why:
- Sometimes, a very high dividend yield reflects not a generous company but one in trouble. That's because a stock's dividend yield rises as its stock price falls. It may be attractive, but if the company is really in trouble, that next dividend may never arrive. Companies try hard to never reduce or eliminate a dividend, but it sometimes happens.
- Even if you find a strong company with a solid (but not over-the-top) dividend, it may not be your best bet. Ideally, you want a company that increases its dividend regularly. As Mathew Emmert describes in How to Achieve 20% Yields, when companies keep boosting their dividends, you can end up making a lot of money. (Take advantage of a free trial of his Income Investor newsletter.)
According to a recent Forbes magazine article, "Out of 12,000 stocks traded in the U.S., a mere 156 have raised dividends in every year of the last ten and have raised them at an average annual rate of at least 10%." The article went on to list some dividend payers held in high regard by money managers. Here are a few of their picks, with their recent dividend yields:
- Johnson & Johnson, 1.9%
If you haven't considered adding dividend payers to your portfolio, you should do so. Learn more with these articles:
- Beat the Market With Less Risk
- Dripping With Dividends
- Extra Dividends, Extra Growth
- Diversifying Your Dividends
- Dividend Funds Missing Dividends
Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson, Microsoft, and Pfizer.