Top Reasons to Buy
Stability
The stock market can be one scary place. Even investors with long investing horizons can allow emotions to force them into actions—often selling after a drop in price—that work against their best interests. One advantage of high dividend paying stocks is that they often tend to be less volatile than non-dividend paying stocks. As a result, investors may be more inclined to “ride out” market downturns. This is critical, as many studies show that investors are often, through bad timing, their own worse enemies.
Income
Of course many investors, particularly those in retirement, rely on dividends for living expenses. Obviously a regular check in the mail can make a stock (or even an entire portfolio) much more appealing to hold on to.
Taxes
Under current U.S. tax law, most dividends are taxed at only 15%. (Please confirm this rate with your tax advisor for any investment you’re considering.)
Total Return
Perhaps the most fascinating thing about dividends is what they can do for investors who don’t use them for living expenses. Many investors in dividend paying stocks participate in dividend reinvestment plans (DRIPs). These plans allow for the accumulation of additional shares in lieu of dividends.
It’s widely understood that a mutual fund investor who dollar cost averages into a fund over time can purchase more shares for a fixed amount when share prices are lower. In a similar way, those participating in DRIPs actually accelerate their accumulation of a stock when the price drops (provided the dividend is maintained). Please note: many sound companies do maintain their dividends even during rough economic times.
Jeremy Siegel, in his book, “The Future for Investors,” suggests clearly and illustrates in exhaustive detail that over periods of decades, through good times and bad, dividend paying stocks have offered investors the greatest return. For anyone interested, I highly recommend this book.