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THE BASICS OF DIVIDENDS: Anytime you buy a stock - that entitles you to a small portion of that companies profits…and, SOMETIMES, those profits are distributed to you on a regular basis in the form of a DIVIDEND.
THE GOOD:
ONE, you’re INSULATED from the stock market. For the most part, you KNOW that you’ll get that VERY same dividend payment - in the exact same amount - regardless if your stock trades for $20 or $40…and, for someone who’s expecting consistent cashflow, this helps smooth out the fluctuations in the market.
Second, Dividend Payments have been LESS VOLATILE than Stock Prices. For example, the Simply Safe Dividends blog found that - from 1900 through 2018 - dividend payments remained fairly constant, with an average variance of +/- 10% during market downturns.
Third, throughout Recessions - Dividend payments sometimes INCREASE. As Simply Safe Dividends points out, “in three of the above recessions…dividends paid to investors actually increased, including a 46% jump during the first recession following WW Two.”
Fourth - Dividend stocks have been shown to provide a comparable return to the overall market. Fidelity found that dividends accounted for 54% of market returns during times when inflation was above 5%.
THE BAD:
FIRST, Dividends are not guaranteed. Even though companies generally try to avoid cutting or reducing dividend payments...this DOES happen, and because dividends are often a reflection of a company’s PROFITS - in the event of a downturn, they may chose to turn off the money-facet until conditions improve.
SECOND, Dividend payouts mean NOTHING when the company itself declines in value. In this case…earning 5% annually might actually LOSE YOU MONEY when the STOCK ITSELF declines 30%. Now, SURE - there’s a chance the price recovers while you sit back and collect all that extra cashflow…but, there’s a chance this DOESN’T happen…and, that needs to be considered.
THIRD…Even though there CAN BE some Tax Advantages…there CAN ALSO be some disadvantages.
And FOURTH - Dividends might be flat out “irrelevant.” Two well-known economists argued that a company’s dividend didn’t matter - AT ALL - because it has little to no effect on the price of a stock or its cost of capital.
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