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In Volatile Markets, Investors May Find Comfort in Dividends

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by Al Benelli, CFP, FIC

In Volatile Markets, Investors May Find Comfort in Dividends

As uncertainty at home and abroad roils the financial markets, income-minded investors may find dividend-paying stocks offer an attractive mix of features and warrant a place in their equity portfolios.  The appeal is simple: Dividend-paying stocks can provide investors with tangible returns on a regular basis regardless of market conditions.
If you own stock in a company that has announced it will issue a dividend, or if you are proactively considering adding an allocation to dividend-paying stocks, history provides compelling evidence of the long-term benefits of dividends and their reinvestment.

A sign of health: Dividend payouts are often seen as a sign of a company's financial health and management's confidence in future cash flow. Dividends also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength.

A driver of total return: There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.

Lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and over long time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with considerably less risk than non-dividend-paying stocks. Although past performance is never a guarantee of future results… since 1990, the S&P 500 Dividend Aristocrats -- those stocks within the S&P 500 (an unmanaged index) that have increased their dividends each year for the past 25 years -- produced superior returns with lower volatility as measured by standard deviation.    If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind…

Dividend-paying stocks may help diversification: Income-oriented investors may want to diversify potential sources of income within their portfolios. Given current realities present in the bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.

Dividends benefit from continued favorable tax treatment. The extension of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill that passed in late 2010 extended the 15% tax on qualifying dividends and other forms of investment income through December 31, 2012.

Very Important: Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.  Dividends ARE NOT guaranteed.

Tags: boomers money financial planning investments financial advise

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