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Answer:
Dear
Mr. Higgins,
There
are a number of advantages to owning dividend-paying
stocks and no disadvantages -- as long as the company
is financially sound and well run. Keep in mind, of
course, that like any stock, even one that's paid
dividends year after year, could drop in price.
The
Definition
First,
let's take a look at what dividends are. Simply put,
they are a cash payout that a company gives stockholders.
They are one way the company can reward the stockholders
for their loyalty. Dividends are also a way for the
company to distribute some of its profits.
Dividends
are paid in a fixed amount for each share of stock
held. Most companies make quarterly dividends. Dividends
are approved (or disapproved) by a vote of the company's
board of directors.
The
Five Key Advantages
(1)
They add up over time. You can either reinvest
your dividends in additional shares of the company
-- a no-brainer way to increase your portfolio. Or,
you can take the dividend check and invest it in another
stock or bond, or put it in your nest egg, which might
be a money market account or savings account.
Note:
Joseph Lisanti, editor of Standard & Poor's The
Outlook noted, in the Feb 28, 2005 issue of Business
Week, that over the history of the S&P 500 Index,
about 40% of the total return to shareholders was
derived from dividends.
(2)
They come with a tax break. If you have a bank
CD, the interest it earns is taxed as your maximum
tax rate. That could be as high as 35%. However, qualified
dividends are taxed at the more favorable long-term
capital gains rate. That rate for most people is 15%
and for investors in the lowest tax brackets, it's
only 5%.
(3)
The dividend could go up. Many companies with
a strong balance sheet will periodically raise their
dividend.
(4)
The stock could go up. If the company has a good
management team, a leader in its particular industry
and the stock market in general is performing well,
the stock could go up in price.
Of
course, you should not count on a stock appreciating;
however, when a company pays a regular dividend, it's
a pretty good indication that it is in good financial
shape, that it has the cash to cover the payments.
That in turn most likely means that its profits are
on the increase.
Think
of the reverse -- when a company cuts or cancels its
dividend, it does so because it is in some sort of
financial difficulty or it thinks it might be. On
the other hand, an increased dividend sends out the
message loud and clear, "we're doing well."
(5)
The company is careful. When a company has an
established pattern of paying a dividend, it knows
it must be cautious and keep expenses in line -- so
it has the cash to make the quarterly payouts.
Think
of it in terms of your mortgage. You know it's due
every month so you keep other personal expenses in
line so you can make that payment to your lender.
You want to avoid late penalties, a damaged credit
rating and foreclosure at all costs.
Finding
Divided-Paying Stocks
In
addition to watching and reading the financial news,
here are two good sources of information:
-
You will find a list of companies that have raised
their dividends 10 years in a row at: www.dividendachievers.com.
Note:
There's
also an index that tracks the performance of these
stocks called The Dividend Achievers 50 Index. To
be eligible to be in the index, a stock must be
U.S. incorporated, trade on the NYSE, AMEX or Nasdaq
and have increased its divided for at least the
last 10 consecutive years. The AMEX symbol for the
index is DAY.
- And,
Stamdard & Poor's lists what it calls "Dividend
Aristocrats" at www.dividendaristocrats.standardandpoors.com.
The Aristocrats are companies that have raised their
dividends for at least 25 years. S&P has also turned
the Aristocrats into an index -- you can read about
it at: www.standardandpoors.com/indices.
Good
luck!
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