Turn on a business report on any given day, and you’re likely to hear about the daily undulations of the stock market. While keeping track of stock appreciation is vital to any portfolio, it’s not a comprehensive indication of how well any given stock might actually be performing.
To that point, dividends can be an entirely separate source of investment growth that can often go unheralded by headlines but still prove to be incredibly beneficial to the average investor. In other words, integrating dividend-yielding stocks into your portfolio can provide a consistent source of additional growth that can minimize the impact of volatility and help you better reach your financial goals.
What Is a Dividend?
Simply put, a dividend is a fractional share of profits that is distributed to a company’s shareholders. Typically speaking, dividends are paid by older, well-established corporations that are most often part of highly industrialized market sectors like manufacturing, utilities, and telecom stocks.
Whether you own a dividend-yielding stock individually or through a mutual fund or ETF, the profits that are distributed back to you through a dividend can either be held as cash within your account or reinvested to purchase additional shares. Although not as common as they once were, dividend reinvestment plans – commonly referred to as DRIPs – allow investors to directly purchase and hold stock from a particular company without the need of opening a brokerage account. Although they can be highly cost-efficient, DRIPs lack the tremendous convenience and flexibility of purchasing dividend-yielding stocks through a broker.
Certain precautions should be used depending on your specific financial circumstances, even when using something as simple and efficient as dividend-yielding stocks. First and foremost, depending on the type of account that holds the position, dividends can increase your tax exposure since the yields are most often subject to taxation. Holding such stocks within a retirement account is a great way to eliminate the impact of higher income taxes while still enjoying the benefits of a dividend.
Also, stocks that pay a consistent dividend can often trade at higher price points since the market will include the yield in trading prices. Therefore, just like any other position in your portfolio, dividend-yielding stocks need to be used appropriately to derive the most significant benefit from them.
Have questions about how dividends can play a role in your portfolio or need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation today!