Stocks can be sliced and diced any number of ways, but there’s one clear division that neophyte investors trying to save money should be aware of: dividend stocks versus non-dividend stocks. Dividend stocks assure you regular cash payouts relative to how many shares you own, and thus present an interesting savings opportunity.
The Psychology of Dividends
Dividend stocks are attractive for people trying to conserve money because they are not at risk. Once they’re out of the company’s coffers and inside your pocket, dividends are no longer subject to the whims of the stock market. A dividend is your money to spend however you like: reinvest in the market; put into gold; set on fire to warm your home. But dividends are perhaps best for diversifying savings.
Because psychologically, it’s a simple task. Saving dividend money, as opposed to a chunk of your paycheck, is effortless, and frankly takes far less self control. Those small dividend paychecks are easy to treat like they’re not even yours– they’re your bank account’s. No slicing, no dicing. Think of it like your retirement fund’s change jar, a little nest egg within your larger nest egg.
But when looking for stocks to invest in, remember: not all dividend stocks are created equal.
What Kind of Dividend Stocks Should be Avoided?
As dividends are paid out of the company to their stockholders, that is less money the company has to reinvest in things like product development. So there are some kinds of companies that, although they might pay a nice dividend, should be considered cautiously.
Tech companies thrive on innovation, and getting ahead via superior product development is essential to their sustainability. This is not to say no tech company that pays a dividend is worth investing in. Apple Inc. (AAPL) after all is a tech company that pays a dividend, but they are also the biggest company on the planet and have more cash than some small countries, so they can certainly afford to pay out money to shareholders without sacrificing product development. But smaller tech companies that are still trying to find their foothold yet pay dividends should be looked at with a healthy dose of skepticism.
Small healthcare sector stocks as well should, as a rule of thumb, not be paying a dividend. Getting a product fully developed should be their only focus, not prematurely rewarding investors.
What Kind of Dividend Stocks are Best (AKA the Safest)?
Not surprisingly, investors often like stocks that pay out a very high dividend. This is why Master Limited Partnerships (MLPs) are so popular – they often pay out dividends exceeding 10 percent. But this isn’t to say they’re the smartest choice for amateurs looking to save,as MLPs can be volatile. Often, if a stockholder is looking for a nice, safe dividend stream, a large, stable company is often the right choice.
The S&P 500 is comprised of 500 of the biggest companies by market cap on the American stock exchanges. Of those 500 companies, 416 pay a dividend. And of those 416, 11 companies pay out a dividend to stockholders of 5 percent or higher, and four pay 6 percent or higher –CenturyLink Inc. ($CTL); FirstEnergy Corp (FE) ; Frontier Communications Corporation (FTR) ; Windstream Corporation (WIN) .
Keep in mind, however, that large dividends come at the expense of profits: none of those companies have sported a YTD gain of over 20 percent, and CenturyLink and FirstEnergy have actual lost valuation on the year. But a nice high return and high dividend aren’t always antithetical – cigarette peddler Altria Group (MO) has had a return of 22 percent on the year, and also pays out a 5 percent dividend.
Any investment decision should be made in tandem with a professional. But for investors looking to save, a dividend stock can be a nice way to go.