Are you interested in investing for income over the long term rather than in participating in the daily ups and downs of the stock market, and want to know what would be a good investment strategy?
One choice for income seekers may be quality, long-term dividend-paying stocks. Many "name brand" companies haven’t only paid dividends consistently since the early 1990s; in some cases, they have also steadily raised their dividends by an average of 10 percent or more per year.
What makes these stocks attractive to long-term investors? Consistent dividend growth stocks may be attractive for long-term investors who can hold the stocks as dividend payments rise. Although the stocks’ current yields may not seem competitive at first, growth in dividend payments can significantly increase the yield on an original investment.
Why is dividend growth so important? An investor seeking income could purchase conservative fixed-income investments, such as Treasury bonds.
In fact, every well-balanced portfolio should contain such investments. However, without the power of dividend growth, inflation will take its bite, and these investors may end up losing ground to inflation over time.
What should you look for in a quality stock? Consider three factors that can limit your risk and keep your income growing when you’re looking for income among stocks:
- A low payout ratio gives the dividend room to grow. The payout ratio is the percentage of a company’s earnings per share (EPS) paid out as dividends in the current year. The lower the ratio, the more room for potentially boosting the dividend. Remember, for a leading company to retain its leadership position, it will have to channel a good portion of its earnings toward growth. Thus, payout ratios may be lower for these stocks than they are for electric utilities or other companies in slow-growth industries.
- Capital appreciation potential can enhance returns. Regardless of whether or not they receive a dividend, most investors buy a stock hoping its share price will rise. Consider how the value of your investment would increase if, in addition to annual dividend increases, the company’s stock price also rose, for example, in line with the S&P 500 average.
- Dividend payment history can provide clues about the future. Although past performance doesn’t guarantee future results, a company with an unbroken record of paying dividends for 30-plus years would seem to be reliable for income. A history of growth in the dividend is equally important.
However you choose your income stocks, the key is holding them for the long term, which means daily and monthly price swings may not be as important.
Remember, the time in the market—not timing the market—is most important to investment success. IBI