Dividend paying stocks are a good way to generate income for retirement or other times in your life when you need to support yourself from your portfolio. By purchasing a set of stocks that pay a large dividend you can receive a quarterly payout of a portion of profits from the companies rather than needing to sell shares to raise cash. So long as the company continues to make enough money to keep paying the dividend, the investor need not worry about the share price, which will fluctuate. In addition, the fact that the stock is paying a good dividend will generally support the price of the stock during downturns. While other stocks are going down 20%, a stock with a good dividend might only go down 10%, for example.
Stocks that pay dividends are older, established companies that have grown to the point where they don’t need to reinvest their profits and instead can give some income to investors. Things like Coca Cola, McDonald’s, Microsoft, Intel, Proctor and Gamble, and most recently, Apple Computer. Traditionally utility companies pay large dividends since their business is mainly to generate revenue through power sales to a relatively fixed area. Drug stocks also generally have larger payouts.
Stocks normally pay dividends once a quarter, or four times a year. If done right, you can overlap stocks that pay dividends at different times with bonds and other income-generating investments to generate steady cash throughout the year.
A disadvantage to dividend paying stocks is that you will be taxed on the dividend even if you reinvest the money to buy more shares. Conversely, if you buys stocks that have no dividends, there will be no taxes due until you sell and make a profit on the shares. If you buy dividend stocks simply for the protection against declines and don’t need to money now, it therefore makes sense to buy these in IRA and other tax-deferred accounts and keep mainly no dividend growth stocks in your taxable accounts.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.