Dividends are an increasingly important part of investment strategies for investors. A dividend provides a certain level of income stream from an equity that is part of the total return provided by an investment. Said another way, dividends are similar to interest payments on bonds and are made on a regular basis each quarter.
Historically, dividends have provided a significant percentage of overall returns in equity markets. The amount paid as a percentage of overall return varies based on each decade, but in general, dividends provide anywhere from 30% to 40% of the total return of any stock investment. Certainly, with the rise of technology companies, dividend payout ratios on average have declined. However, there is evidence to suggest that the momentum may swing back the other direction as investors become more concerned about volatility and seek greater income yields given low interest rates.
Dividend-oriented investments can provide a flow of income to investors paid directly to checking accounts or alternatively, to be paid back to investment portfolios and reinvested in assets currently held. Reinvestment of dividends provides investors with an opportunity to dollar cost average additional funds back into a portfolio strategy in order to grow overall long-term return. While dividends are not guaranteed and are declared on a regular basis by the Board of Directors for each company, there is a reasonable degree of certainty depending on the stock chosen that dividends can be relied upon for income streams.
Dividend payments provide an opportunity for investors to take advantage of higher yields than they normally might receive on other alternative form of assets given that interest rates are at such low levels. Dividend coverage ratio and other statistics should be assessed on a regular basis to determine if the dividends payable are likely to be paid in the future. This is an important due diligence process for investors.
If you would like more information about dividends and how they might work to your benefit, please contact our financial planners in Walnut Creek at Destination Wealth Management and we would be delighted to sit down with you and speak with you about how dividends might fit into your overall strategy.
Destination Wealth Management is a client-centered wealth management firm that offers investment management, financial planning, and a holistic approach towards helping our clients in Walnut Creek succeed throughout every important life transition.