Dividends Never Die
You can hold your stock market gains in your hands if you invest in dividend-paying companies. Instead of reinvesting profits into growth to hopefully buoy stock prices, plenty of blue-chip champions simply dish out their excess cash to investors directly.
Look for high dividend yields and payout ratios, but not too high. An fat dividend yield (>4%) usually means a low stock price, suggesting a possible skeleton in the closet. A high payout ratio, near 80-100%, indicates the dividend is probably unsustainable. Businesses need to retain some cash, so find a balance and receive a tangible income drip into your bank account. Although taxable, it’s a warm feeling!
Eleven years ago, when investors saw subprime mortgages defaulting, it was clear what economic collapse would ensue. Major indices were in freefall amid unanimous negative sentiment.
The toast hit the floor, marmalade-side-down, and that meant a deep recession, just like this one. ‘Dividend champions’ felt the squeeze. Companies had to adapt very quickly, a hallmark of the crash being mass cuts and suspensions of dividend payments.
However, this crash is different. According to Bloomberg, only 21 of 500 S&P 500 companies are set to suspend their dividends in the second quarter. Apple, Johnson & Johnson, and IBM are planning to increase their dividends!
These benchmark index companies hate suspending their dividend and would bend over backward to keep it going. It’s worthwhile to keep their twenty, fifty, and eighty-year long divi-streak reputations alive. That’s what their investors value most highly in their stock.
There could be a revolt if the drip was turned off, but now there’s a serious trade-off for investors to consider. This month has seen non-dividend paying stocks soar. Amazon’s stock price has rallied 42%, Netflix has rocketed 37%, and Tesla has risen 72%.
Cash is king, and these companies are retaining it. Dividend stocks offer you a side income that’s more important now than ever, but as a group, their chart behavior is more tempered. The ball’s in your court!