Homeowners have enjoyed low interest rates, but income investors are feeling the sting of the recent economy. Yet some people have overlooked equity-income investments as a viable income-producing investment category that may also help with other financial objectives, such as reducing portfolio volatility.
Long-term investors often purchase equities
for their growth potential. Since capital appreciation is the goal, some
stock-issuing companies reinvest their earnings in the company. The hope is
that as they grow, they'll capture more market share and the price of their
stock will also increase. Essentially, the reward for the investor is delayed,
if it occurs at all.
Other companies opt for instant gratification, paying part of their earnings, called dividends, to shareholders. Dividends are issued on a regular basis, often quarterly. Many large, well-established companies in the S&P 500, such as Coca-Cola and General Electric, have historically issued dividends, according to Standard & Poor's.
There are several reasons to consider adding
dividend-paying stocks to your portfolio:
- Equity-income investments may provide supplemental income, during retirement, for example. They offer another choice for potential income in addition to bonds and cash equivalent investments. And dividend income may help provide a cushion in your portfolio against stock market volatility.
- Dividend-paying stocks have at times outperformed non-dividend paying stocks. The prices of dividend-yielding equities have historically fluctuated less than non-dividend paying equities. Considering an addition of these income-producing stocks to your portfolio could potentially help smooth the impact of market swings.
- According to Standard and Poor’s, a significant number of companies have increased dividends in recent years.
One way to tap the potential of
dividend-paying stocks is to invest in an equity-income mutual fund.
Professional money managers carefully screen companies, looking for consistent,
financially stable dividend payers. Additionally, the fund managers may
purchase the stock of many companies, potentially reducing risk. Note that past
history in regard to performance and payments of dividends does not indicate
that they will always continue to do so into the future.
It's important to choose investments that match your needs. If equity income
seems appropriate for you, ask a qualified financial professional for help in selecting
from the many dividend-paying stocks and stock mutual funds available.
Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and director of HVFCU Financial Services, the investment division of Hudson Valley Federal Credit Union, which is based in Poughkeepsie, NY.
Securities and advisory services offered through LPL Financial, a registered investement advisor. Member FINRA/SIPC. Insurance products offered through LPL financial or its licensed affiliates. Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial.
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