A Potential Source of Income
If you’re looking for an investment-income source, you may want to consider adding dividend-paying stocks to your portfolio. They may be especially appealing to retirees or investors who aren’t comfortable with a lot of risk.
Going With the Flow
Some companies, such as utilities and financial institutions, pay cash dividends to stockholders on a quarterly basis. These stocks may experience less volatility than stocks that don’t pay dividends. When the stock market declines, investors tend to seek out dividend-paying stocks, boosting the stocks’ prices.
Dividends may also be appealing because they receive favorable tax treatment. For investors in higher tax brackets, the tax rate they pay on qualified dividend income could be significantly less than the tax rate they pay on other types of ordinary income, such as interest.
Following Your Own Current
Dividend-paying stocks are an investment option even if you’re not looking for income. You can reinvest the dividends in additional shares of stock and benefit from compounding. Plus, the value of your stock could go up due to price appreciation. Keep in mind, however, that you must still pay tax annually on dividend income — even if it’s reinvested.1
Don’t Get Swept Overboard
Also keep in mind that dividends aren’t guaranteed. Choose your dividend-paying stocks carefully since some companies may increase dividends to attract investors if their finances aren’t watertight or their image is murky.
Looking at the dividend yield can help you evaluate a stock’s dividend-paying history. Of course, just having a high yield doesn’t mean the stock is definitely a good investment, and past performance doesn’t guarantee future results. The amount of any dividend may vary over time.
Your financial professional can help you determine if a dividend-paying stock is a good fit for your portfolio.