Attributes Of A Good Dividend Stock

2008 May 6

by Kyle

from → Investing And Investments, passive income

Dividend paying stocks are the bread and butter of every income investor living off their portfolio income (or aspiring to, anyway). As far as passive income strategies go, dividend-paying stocks sit at the top of the heap. After an initial research effort, good dividend stocks can be held for years, even decades, providing a stream of steadily rising inflation-adjusted dividend income, making them ideal sources of passive income. This is part one of a four-part series investigating the various attributes of good dividend paying stocks.

The Case For Dividends

Since 1930, stock dividends have comprised approximately 50% of the stock market’s total return. While dividend payout ratios have decreased steadily over the past 30 years, dividends have still comprised a solid 30% of the market’s total return over that period. Simply put, dividends matter. Not only do reinvested dividends drive investment returns, they put a damper on price volatility as well. The owner of a non-dividend-paying stock has nothing to fall back on in a bear market. With nothing in the way of tangible cash flows, non-dividend stocks tend to exhibit greater price volatility than do their dividend-paying cousins. Dividend stocks, on the other hand, pay you while you wait. It’s much easier to persevere through price declines when you’re receiving quarterly cash payments to tide you over. Furthermore, cash dividends tend to put a floor under stock prices. If the price declines too much, investors will start buying merely for the high yield.

A Rising Income Stream

Dividends have one especially important advantage over fixed-income investments: they rise with inflation. If you buy a 10 year bond and hold to maturity, you know exactly how much interest income you will receive every year. The problem is, the purchasing power of those interest payments may be half what they are today due to the erosive effects of consumer price inflation. A diversified dividend stock portfolio will tend to generate income at least equivalent to the rate of inflation over the long term, preserving the purchasing power of your portfolio indefinitely.

Attributes Of A Good Dividend Stock

Now that you know the importance of dividends in a portfolio, we’ll examine a few of the most important attributes you should look for when shopping for dividend-paying stocks for your portfolio. Tomorrow we’ll examine the first attribute of a good dividend stock: a long history of rising dividends.