As interest rates dropped over the past eight years, investors seeking income sought out the benefits of stock dividends. Companies with healthy cash flows and steady earnings tend to pay consistent dividends to shareholders. These dividends deliver a steady stream of income while also offering the opportunity for long-term capital appreciation from the price of the underlying stock.
During periods of increased market volatility, dividends act as a buffer against the uncertainty of corporate earnings and a changing economic environment. Dividend paying stocks tend to be largely held by institutions and pension plans seeking consistent income in addition to conservative long-term growth.
Management becomes more accountable with dividends since a reliable stream of cash flow and earnings is essential to maintaining consistent dividend payouts. Companies may also tend to increase their dividend payouts as their earnings and cash flow increases, acting as a hedge against inflationary pressures.
Value vs. growth stocks
Historically, stocks termed as value companies that have reached their growth cycle tend to be dividend payers, versus growth companies that would rather reinvest their cash back into their companies for further growth. Over the past few years, the amount of cash accumulated by companies after paying all debt and operating expenses has increased, allowing some growth companies, such as those in the technology sector, to pay dividends to stock holders.
Many investors have found that a balance between dividend paying stocks and interest paying bonds tends to generate consistent and reliable income streams, and with conservative growth.
With the uncertainly in today’s volatile stock market, dividends from stocks provide a more predictable cash flow in your accounts despite fluctuations in the overall value of the underlying stock. There will be a positive cash flow to your account, even if the value is slightly down at any point in time, allowing you to be more patient with temporary instability in the markets. Contact us to find out how stocks are playing a part in your portfolio.