Small Payments Can Boost Returns
Owning shares of stock or stock
funds might increase the value of your
portfolio in one of two fundamental
ways: capital appreciation (i.e., price
increases) and dividend payments. Of
the two, capital appreciation carries the
greatest potential for return, but it also
carries the greatest potential for loss.
And any gains or losses are only reaped
when you sell your shares.
By contrast, dividends typically offer
more consistent modest returns that
are paid while you hold your shares.
For this reason, dividends have long
been popular with retirees and others
who are looking for regular income.
But focusing on dividends can be
appropriate for almost any investor,
especially if dividends are reinvested to
purchase additional shares. Although
reinvesting dividends from individual
stocks may not be cost-effective, mutual
funds and exchange-traded funds
(ETFs) generally offer an option to
reinvest dividends and/or capital gains.
Growth and volatility
In general, more established
companies tend to pay dividends, and
these companies may not have as much
growth potential as newer companies
that plow all of their earnings back into
the company. Even so, dividends can
boost total return. A 2015 study found that dividends had accounted for about one-third of the total return of the S&P 500 index since 1956, with the other two-thirds from capital appreciation. In the fourth quarter of 2017, more than 80% of S&P 500 stocks paid a dividend with an average yield of 1.87% for the index as a whole and 2.24% for dividend-paying stocks. Many mid-size and smaller companies also paid dividends.1
Because dividends are by definition
a positive return, even during a down
market, dividend-paying stocks may
be less volatile than non-dividend
payers. However, dividend stocks tend
to be more sensitive to rising interest
rates; investors looking for income
may move away from stocks if less
risky fixed-income investments offer
Dividends are typically paid
quarterly in the form of cash or stock.
The amount is set by the company's
board of directors and can be changed
at any time. Dividends can be
expressed as the dollar amount paid
on each share or as yield — the annual
dividend income per share divided
by the current market price. When
the share price falls, the yield rises
(assuming dividend payments remain
the same), enabling investors who
reinvest their dividends to buy more
shares that have the potential to grow
as market performance improves.
Investing in dividends is a long-term
commitment. In exchange for
less volatility and more stable returns,
investors should be prepared for
periods where dividend payers drag
down rather than boost an equity
portfolio. The amount of a company's
dividend can fluctuate with earnings,
which are influenced by economic,
market, and political events. Dividends
are typically not guaranteed and could be changed or eliminated.
The return and principal value of all
investments fluctuate with changes in
market conditions. Shares, when sold,
may be worth more or less than their
original cost. Supply and demand for
ETF shares may cause them to trade at
a premium or a discount relative to the
value of the underlying shares.
Mutual funds and ETFs are sold by
prospectus. Please consider the
investment objectives, risks, charges,
and expenses carefully before investing.
The prospectus, which contains this and
other information about the investment
company, can be obtained from your
financial professional. Be sure to read
the prospectus carefully before deciding
whether to invest.
1S&P Dow Jones Indices, 2015, 2018