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Need Investment Income?
4 Reasons to Consider Dividend-Paying Stocks
June 8, 2011
By Peter C. Thoms, CFA
Founder, Orion Capital Management LLC
At Orion Capital, we help our clients to simplify, streamline and gain control of their financial lives. We believe that you ought to know exactly where your money is, how it is invested, and why it is invested the way it is.
These are difficult times for investors. Interest rates are at generational lows, so it is very difficult to develop a robust income stream using money market funds, CDs or bank savings accounts. Given the paltry interest rates on bonds and other fixed income instruments, by far our preferred way to build income streams for our clients is with U.S. and international dividend-paying stocks.
Everyone has a different financial situation and level of comfort with risk, but we believe there are four reasons why dividend-paying stocks merit consideration for inclusion in a long-term investor’s portfolio:
Reason #1: A Signal of Health
Dividends are a sign of corporate health. Companies committed to paying dividends to their shareholders often maintain this commitment over years or even decades, thus providing their shareholders with an income stream that grows over time. Because dividend payments are a tangible manifestation of financial health, companies usually cut their dividends only in dire circumstances.
Reason #2: Lower Volatility
Dividend-paying stocks exhibit lower volatility than non-dividend stocks. Extreme market volatility can force even experienced investors to take actions that hurt themselves in the long run—such as reducing or eliminating their equity holdings during times of pronounced market weakness. A portfolio of financially strong dividend-paying companies may be easier to live (and sleep) with, however, as the dividend stream it generates helps to offset market volatility.
Reason #3: Capital Appreciation Potential
Dividend-paying stocks offer the possibility of capital appreciation. Unlike bonds, whose interest payments are fixed (hence the name “fixed income”) dividend-paying stocks offer their owners two ways to win—through dividend income as well as through capital appreciation.
Reason #4: Superior Total Returns
Dividend-paying stocks, as a group, have historically generated a much higher total return than non-dividend payers. Furthermore, dividend-growers—those companies that have increased their dividends over time—have performed even better than the group of all dividend payers. This is the reason we focus on investing in companies that not only pay healthy dividends, but that also have demonstrated both the ability and desire to increase their dividends over time.
Investing in the equity markets is not right for everyone, but for those needing investment income that would also like to have the potential for capital appreciation, dividend-paying stocks are an option to consider.
If you would like to find out more about how we are using dividend-paying stocks in our client portfolios, please contact us to set up a complimentary appointment.
Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619.435.1701
Email: [email protected]
About the Author:
Peter C. Thoms, CFA, is the founder and managing member of Orion Capital Management LLC, an independent Registered Investment Advisor based in Coronado, California. The firm focuses on managing global equity accounts for both institutional and private clients.
Disclosure:
This document is for informational purposes only. Nothing in this report is to be construed as a specific investment recommendation. This document does not constitute the provision of investment advice, which is only provided by Orion Capital Management LLC under a written investment advisory agreement and only in states in which Orion Capital Management LLC is registered or is exempt from registration requirements. Orion is not a tax advisor and does not provide tax advice. For tax advice individuals should consult their CPA.
