Companies that pay dividends are less risky than the ones that don't, because dividends come from the actual income of the companies. Paying a dividend requires management of a company to focus on the cash flow, earning capabilities, and ultimately, make them only focus on profitability. Dividends are a stable income for investors. For those who seek steady income and lower risk, investing in dividend stocks is a great way to go.
What to look for in a dividend stock?
Although high yields are ideal, the quality of the company and the dividend payout history are very important. We want to look for companies that have demonstrated a long history of dividend payout, and that are consistent, and preferably, have increased dividends over time. Coca-Cola, GE, and Boeing are great ones to begin with.
How to handle dividend payments?
Dividend reinvestment is the best way to go. It also keeps the costs down. The biggest benefit is to enjoy the power of compounding dividends and interest. If automatic dividend reinvestment is not an option, take the cash payout and reinvest in the index funds.
Why not Google, Amazon, or Apple?
Google has never paid a dividend, and nor has Apple since 1996, but Apple did start paying dividends in 2012. Amazon never paid dividends, and always posted a loss quarter after quarter. However, these companies' stocks are so called growth stocks. Their valuation is different. One can argue that investing in these companies makes more money. It also comes with higher risks. Apple has struggled since 1996. Did you know it would come out with IPOD and hit big? All it comes down to is your risk tolerance.
Actually, some of the best performing stocks have managed not only to grow business but also pay a rising dividend over time such as McDonald’s and Coca-Cola. Their stock prices may not have risen over 50% a year, but they also wouldn't have made you lose sleep when the economy gets worse.