Companies can change their dividends based on their financial performance, but usually they are paying an amount the company should be able to weather in good years and bad. Compare that with the daily change in capital appreciation (or decline) of any given stock in the stock market.
Example; if you buy a stock with a 4% dividend yield and that stock’s share price declines by 1% over the year; you still have a positive total return of 3%. (caveat: dividends are usually taxed at capital gains rates, which at tax time will eat into the total return)
Where to find yield
Most ODs’ investment portfolios aren’t large enough to adequately diversify by buying individual stocks, it can take millions of dollars to have meaningful diversification. But, there are many ETFs (exchange traded funds) and mutual funds that focus on high income stocks. I was reviewing a fund on Friday that has over a 15% yield (its important to note the risk to this fund is pretty high too). So the value of that underlying portfolio would have to decline by 15% over the next year for it to have a negative pre-tax return total.
For investors who are nervous about stocks, there is a special kind of hybrid security called preferred stock that is basically a hybrid between a stock and bond (if a company defaults, bondholders get paid first, preferred stock holders next, and stock owners last). Usually issued by banks, as of Friday these kinds of securities were yielding between 5-6% for the shares issued by the largest banks in the US. There are pluses and minuses to using these kinds of securities, so be sure to talk with your financial advisor about whether they are appropriate for your situation.
Before you buy or sell a stock, be sure to look at the dividend yield to get a sense of the cash return you might expect on an annual basis regardless of what the stock price does. It may not sound sexy at cocktail parties, but it can be a sensible approach to capturing long term return in a volatile market.
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