When interest rates start trending lower, many of my clients come to me with questions about income-generating investments, like dividend-yielding stocks. Depending on your risk tolerance and long-term goals, dividend-yielding stocks may play a role in your portfolio. But first, let me lay out some information that may be helpful as you weigh your choices.
What Are Dividends?
Dividends are taxable payments made by a company to its shareholders. When a company makes a profit, that money can be put to two uses – it can be reinvested in the business, or it can be paid out to the company’s shareholders in the form of a dividend.
The fact that a company is paying dividends is only one factor to consider when choosing a stock investment. It’s important to keep in mind that dividends can be stopped, increased, or decreased at any time. It can be easy to focus on the amount that the dividend-paying stock distributes, but focusing on the company’s cash position may be a better indicator of whether a company intends to continue paying its dividends.
When it comes to understanding how dividend-yielding stocks are evaluated, dividend ratios are a good place to start:
- Dividend Per Share – measures how much cash an investor is scheduled to receive for each share of dividend-yielding stock.
- Dividend Yield – measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock.
Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. The information in this article is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Companies that pay dividends can play a role in many portfolios. If you’d like help exploring your choices, give me a call.