What Are Dividend Paying Stocks?

by Miranda Marquit · 12 comments

One of the more interesting questions I was asked recently had to do with dividend stocks. My brother was trying to figure out what to do with money withdrawn from a mutual fund. He asked about dividend stocks because he had heard that they offer a reasonably stable return — plus cash pay outs. I thought some basic information on dividend stocks might be of interest to him, and to MoneyNing readers.

An Overview of Dividend Paying Stocks

Basically, dividends represent a portion of the profits that some companies see. They are paid regularly to stock holders. Many companies that pay dividends make their payouts quarterly, but others pay monthly and some pay semi-annually or annually. Companies express the amount that they pay in dividends as a percentage of the stock price.

Dividends are payments made to stock holders on top of anything they would get from selling the actual shares of the stock. Companies that pay dividends do so with a portion of their profits. Companies can stop paying dividends when they want, or adjust the dividend yield as they see fit.

Why Dividend Stocks Can Be Good Investments

As with all investments, dividend stocks aren’t for everyone. However, for some, they can make great additions to an investing portfolio. Dividend paying stocks that regularly pay out a portion of profits are generally stable companies. (Dividend aristocrats, for example, are companies that have increased their pay outs every year for the last 25 years — even during recessions.) If a company consistently pays dividends, keeping the yield fairly stable, it is often an indication that the company has solid profits year after year. Not only will you receive an income stream from such a company, but the stock price is likely to rise over the course of time too.

It is true that the stock price of dividend players might not rise dramatically for these types of stocks. However, stable returns can usually be expected over time, and many of the best dividend paying companies see their stock price recover at the end of a stock down cycle. Dividends are great because they provide a revenue stream that you can use immediately without selling stock, and their presence can indicate a solid stock investment choice.

Another reason that dividend paying stocks can be good investments for some is the presence of reinvestment plans. Dividend reinvestment plans (DRIPs) allow you to automatically invest your dividend pay outs back into the stock. So, if you buy stock in Coca-Cola and enroll in the company’s DRIP, your portion will automatically buy more shares of Coca-Cola stock every time there is a dividend pay out. Often, you are not charged a transaction fee for using DRIPs too, which is an added bonus. In some sense, it’s the equivalent of receiving shares of Coke at no cost to you, helping you build up your shares. Later, when you sell at what will presumably be a higher price, you reap the benefits of having more shares.

Who might benefit from dividend paying stocks: Someone who is interested in building an alternative income stream, especially those interested in income diversity, can benefit from developing a portfolio that includes dividend paying stocks. These stocks can also be good choices for someone who wants good value, and wants to see reasonable growth without a great deal of risk.

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{ read the comments below or add one }

  • VB says:

    There exist some high dividend payers that are extremely risky.. be careful of those. I own some high dividend stocks, but a limited portion of my portfolio, because generally speaking, there is little growth. A portfolio should have at least some non-dividend stocks, which are more likely to appreciate over time. There are tax advantages to dividends, but I’m glad I have my facebook stock (up over 100%) as well as Phillip Morris (high dividend stock) whose stock price is actually down in the same timeframe as when I bought facebook. You can always sell some of your stocks and take the capital gain — you end up with more money in the end! I would never buy a high dividend stock simply for the dividend. Young people with sufficient income should have very little in dividend payers, IMO. They should go for the growth.

  • RDT2 says:

    Just remember that when a dividend gets paid out that the stock price usually drops to match.

    • Altaf says:

      But you have to study & do research that when is the cycle. If the price drops after the payout, avoid holding until that point in time. it is better to buy the stock on earnings day & hold it until the dividend date. You will find the price of the stock is appreciated in many folds. Get out and re-invest when the price is at the bottom. Make a list of stocks & study their cycles.

  • Terri says:

    Every year, I get a measly check from Disney. I think the most I’ve ever gotten is 15 cents for my “dividend payout”. The stamp is worth more than the check.

  • Richard Stooker says:

    The real benefit of stocks that pay dividends, while you’re still working and accumulating wealth, lies in reinvesting those dividends. So next quarter, you receive dividends from a few additional shares, and this builds exponentially over time. One day you’ll observe you’re buying more new shares with reinvested dividends than from your payroll deposit. Eventually your dividend income will exceed your earned income, and you know you can survive even if you’re laid off.

    Many stocks pay dividends, but consumer brand names, financial stocks, utilities, Real Estate Investment Trusts and Master Limited Partnerships offer the best opportunities.

  • B Kelly says:

    One thing that your article did for me is that – IMMEDIATELY when i finished reading your article, i started researching on high dividend stocks in my region (Asia). I am convinced now that my portfolio needs diversification in the form of stocks, and i’ve always been averse to equities as i view it as risky. However, with your tip-off it’s opened up my mind to building a 10% equity portfolio within the next 12 months. To keep things safe and stable for me, i’ll be looking into dividend stocks first. Thanks.

  • Justin @ MoneyIsTheRoot says:

    I own ADP, I bought them a year ago…they pay 3.5% dividend I believe, and the stock price is up 13%. Very good investment. I also own JNJ but they havent seen the same increases…though both stocks have consistently increased their dividends for the past couple decades.

  • MoneyNing says:

    There are actually a good number of stocks that pay dividends. To get started, like Miranda stated, are the dividend aristocrats. You can also achieve something very similar with ETFs such as SDY.

    Another benefit of investing in dividend payers and enrolling in DRIPs is that when the market is down, your dividend will automatically be buying more shares at lower prices.

  • Miranda Marquit says:

    If you are looking for dividends stocks that are relatively safe (no investment is ever completely safe; there is always the risk of loss), you should consider what are known as dividend aristocrats. These are companies that regularly increase pay outs. You can find lists of them by typing “Dividends Aristocrats” into Google. The companies on the list are often those, like Coke, that have the ability to weather recessions.

  • prenuptial says:

    My question is same as of Jenna because its hard to receive nothing even after investing in the stocks.

  • Ken Faulkenberry says:

    Dividend and Dividend Growth stocks should be a part of EVERY investors asset allocation. For most people it should be their major core holding.

  • Jenna says:

    What are some of the company’s that regularly offer dividends?

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