Tahoe-Truckee Market Beat: Reward, and risk, with dividend investing
February 16, 2016
The record low interest rates we've seen over the last few years have made it a difficult time for conservative investors and savers. Many people who would ordinarily invest in bonds have switched over to dividend paying stocks in an attempt to produce more income from their portfolios.
Cash dividends are regular payments by corporations to shareholders, usually on a quarterly basis. Companies can also make stock dividends from time to time.
The S&P Dividend Aristocrats are a group of stocks who have a long term history of dividend increases. Currently there are 53 stocks on the list.
To qualify as an aristocrat, a company must pay a regular dividend and have a history of consistent dividend increases for the last 25 years. The dividend aristocrats have outperformed the S&P 500 on a total return basis for several years, too. Year to date, the aristocrats are down minus -1.77% while the S&P 500 is down minus -8.51%. In the last five years, the aristocrats have averaged 11.22% per year, while the S&P 500 has averaged 9.32%.
The effect of consistent dividend increase can be substantial. By holding dividend growth stocks long term investors can obtain a very high yield relative to their original cost. Had you purchased the S&P dividend aristocrats 25 years ago, today your yield to cost would be over 25% and some the stocks would be paying you over 50% return in cash dividends based on your original purchase price.
If you're thinking about investing in dividend paying stocks, there are a few important dates you should know about when planning for your income.
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The declaration date is the day the board of directors of the corporation announces the amount of the dividend and the date it will be paid on.
The record date is the date that the company will determine who is eligible to receive the dividend; they will determine who the shareholders of record are, and those people will get the dividend payment.
The payable date is the day the shareholders of record will receive their cash payment.
The ex-dividend date is the day that the stock begins trading without the dividend. In other words, if you want to buy a stock to receive the next dividend payment you must make the purchase before the ex-dividend date. You can buy the day before the ex-dividend date and you'll still receive the upcoming dividend.
Investing for dividends can be a good way to produce income, but there are risks, too. A dividend payment is not an obligation like a bond payment; it can be reduced or even eliminated entirely by the corporation.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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