So, you’ve made the decision to start investing, but how do you get started? What should you invest in to build your portfolio? If you’re looking for a more reliable, steady stream of income, investing in some companies that pay dividends may provide a good supplement to your income. Especially in today’s low-interest rate environment, dividend paying stocks are becoming increasingly attractive. But, what exactly are dividends? Is investing in a stock with high dividend yields always the right move?
When a company earns revenue, they ultimately decide to either pay out a portion of the earnings to their shareholders in the form of dividends or to retain the profits within the company as retained earnings. Many new high-growth companies, such as technology companies, rarely offer dividends. Instead, they choose to reinvest their profits into the company in order to promote expansion. Many investors look for the opportunity to invest in stocks in high-growth industries that may not pay dividends because there is a possibility that the stock price could increase significantly.
Other investors choose to invest in dividend paying stocks because they place a higher value on the certainty of earning recurring dividends compared to the uncertainty of profiting on the long-term growth of a company. If you are looking to build a portfolio of dividend yielding stocks, some ETFs, like O’Shares’ ETF (‘OUSA’), for instance are comprised of stocks that provide investors with easy access to dividend paying companies in the US.
When choosing your investments, it’s important to remember that not all great stocks pay dividends and not all stocks that pay dividends are great stocks. Typically, stocks that pay dividends pay an average of 2-2.5% per year. If you come across a stock with a higher yield, it could mean that the company is doing well, or it could be a sign that the company is in trouble and the stock price is plummeting.
If you’re thinking of adding some dividend-yielding stocks to your portfolio, be sure to do some research and find out how consistently a company pays dividends. Companies like Coca-Cola, for example, are known for their reliable dividend payouts. Investing in a company with a more reliable payment stream is less risky than simply looking for the stock with the highest payout. A single high-payout could mean that the company is simply trying to attract investors to drive its price up.
For the reasons discussed above, it’s important to keep in mind that dividend yield is just one factor that can be used to evaluate an investment. Take the following example: Companies A and B both pay a $1 dividend. Company A’s stock has a dividend yield of 10% and Company B’s stock has a dividend yield of 1%. Just looking at these yields would seem to indicate that Company A’s stock is the better choice. However consider that Company A does not regularly pay out dividends and that its stock price recently plummeted to $10.Company B, on the other hand, pays dividends regularly and its stock price has remained stable around $100. Although it seems that Company A’s stock can provide the biggest bang for your buck, Company B’s stock is likely the better investment.
In many of our posts, we stress the importance of diversification when building a portfolio. Building a diversified portfolio will protect your portfolio from market volatility. So, as you investigate different investments, consider building your portfolio with both growth stocks and reliable dividend yielding stocks. This approach will give you exposure to possible gains on price movements as well as provide a reliable income stream in the form of dividends.
All investing carries risk. Past performance is not indicative of future returns, which may vary. Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country’s currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises.
Most inverse ETFs “reset” daily, meaning that these securities are designed to achieve their stated objectives on a daily basis. Their performance over periods longer than one day can differ significantly from the inverse of the performance of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets, making it possible that you could suffer significant losses even if the long-term performance of the index showed a gain. While there may be strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.
Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. The prospectus contains this and other important information about the investment company. You should read the prospectus carefully before investing. Click here to obtain a copy of the prospectus.