Michael Ligon, Author, Serial Entrepreneur, Real Estate Investor, Stock Trader & cofounder of The Ligon Group.
The S&P 500 has delivered an average annual return of approximately 10.5% since 1957. Over the past 20 years, its annualized return has been closer to 8%. This benchmark provides a useful reference point when evaluating investments that aim to outperform the broader market.
My company specializes in real estate investing, and I also trade stocks. Investors like me, who value both income and growth, often prioritize dividend-paying stocks. Over the years, I’ve found that some stocks not only offer consistent dividends but also compare to or outperform the broader market. Today, I use a variety of dividend stocks to balance growth and income in my investment portfolio.
For instance, higher-yielding stocks provide a steady income that I reinvest into other opportunities, while companies with lower-yielding stocks offer capital appreciation potential. By blending these stocks, I routinely achieve an annual portfolio return of 8% to 10%, combining dividend yields with growth.
Pros And Cons Of Dividend Investing
While dividend investing can offer numerous benefits, it’s also important to be aware of the potential drawbacks.
Benefits:
• Potential for steady income: Regular dividend payouts may provide a reliable income stream.
• Performance: Some dividend stocks may outperform the broader market over the long term.
• Resilience: These stocks tend to have strong financials, which can make them more stable during market downturns.
Drawbacks:
• Lower growth potential: High-dividend stocks may not offer the same capital appreciation as growth stocks.
• Tax implications: Dividends may be taxed, which can reduce the net income for investors.
• Sector concentration: Many high-dividend stocks are concentrated in specific sectors like utilities and consumer staples, which could limit diversification.
Deciding What’s Right For You
When deciding if dividend stocks align with their investment goals, I suggest asking yourself a few important questions, including: What is your primary investment objective? Do you want growth, income or a balance of both?
Moreover, are you comfortable with the potential tradeoff between dividend yield and capital appreciation? How does your risk tolerance align with the potential volatility or stability of dividend-paying stocks? Will dividend income meet your financial needs, or will you rely more on capital gains? How well does your portfolio balance diversification across sectors?
By addressing these questions, you can determine whether dividend stocks are a suitable fit for your investment portfolios.
Doing Your Research
You’ll also want to do your research on stocks and their performance before making an investment. There are a number of reputable financial resources you can consult with, such as Yahoo Finance, Morningstar, The Motley Fool and more. Explore trusted platforms that provide stock analysis, historical performance and dividend data to help you make informed investment decisions.
When researching dividend stocks, here are a few key factors to consider:
• Dividend yield: Evaluate the yield in comparison to industry benchmarks and ensure it aligns with your income goals. Consider whether the stocks you’re looking at have yields that seem unsustainably high; this could indicate financial instability.
• Dividend history: If a company has a track record of consistent or increasing dividend payouts over several years, this can reflect financial strength and commitment to shareholders.
• Payout ratio: Assess the percentage of earnings paid out as dividends. A lower ratio often indicates that the company retains enough earnings for growth while still rewarding investors.
• Earnings growth: Review the company’s earnings trends over time to ensure it can sustain or grow dividend payments.
• Industry and sector outlook: Understand the industry trends and economic conditions affecting the company’s sector. Some sectors may be more resilient to market downturns than others.
• Valuation metrics: Use tools like price-to-earnings (known as “P/E”) ratios, price-to-book (or “P/B”) ratios and dividend discount models to evaluate whether a stock is fairly priced.
By incorporating these practices, you can make more informed decisions and identify dividend stocks that align with your investment goals.
Conclusion
For investors looking to build wealth and enjoy a steady income stream, dividend stocks may be worth considering. They’re an integral part of my investment portfolio, so I’ve seen that they can be a compelling choice for investors seeking both income and growth. There are several dividend-paying stocks from which you may choose; however, remember to do your due diligence and consult with a financial advisor to identify investments that align with your goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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