There are many methods that people utilize to decide which stocks to invest in. Some people use fundamental analysis to evaluate individual companies based on their income statements and balance sheets. Others use technical analysis and watch a stock’s price movement to determine when to buy and sell. Demographics, Google search patterns, even astrology have been the basis to try to predict stock market moves. But a very old and well-loved strategy is buying stocks with healthy dividends. And that’s what I’ll be writing about today.

But, let’s take a step back first. What are dividends? Dividends are a payout from a company typically based on their earnings. When a company becomes profitable, they often will pay back their investors by giving them a certain amount of money per share. Dividing the annual dividend amount by the stock’s share price gives you the annual dividend yield.

It is not required that a company pay dividends. Many successful and highly valuable companies do not. Alphabet (aka Google) does not. And it is the one of the largest companies in the world. Amazon and Netflix also do not pay dividends. Whether a company pays a dividend is entirely up to their board of directors. And that decision will be based on a number of factors including, but not limited to, the reliability of their cash flow, the alternative uses for their cash, and the expectations of their shareholders.

Generally speaking, companies with higher growth rates tend to not pay dividends. They use their earnings to reinvest in themselves and hopefully keep that growth going. Companies that are more mature with slower growth, often do pay dividends, especially if they are in certain industries such as utilities, telecommunications and pharmaceuticals.

One of the biggest attractions to dividend paying stocks is that they pay you a cash return. As long as the company pays its dividend, you are getting some kind of yield on your investment. So, let’s say you buy a stock at $50 per share and it pays a $1 per share annual dividend. If the stock price stays completely flat, then you still have a 2% return. If the stock moves to $53 in a year, you have earned an 8% total return (2% in dividends + 6% in price appreciation). According to Fidelity Investments, in the eight decades ending in 2010, dividends contributed 44% of the total return of the S&P 500*.

Now, of course, dividends are not the be-all and end-all of picking a stock. If they were, we’d just find the highest yielding stocks and buy them. But it’s not that easy. Stocks that pay dividends will fluctuate in price just like any other stock. So, you could gain the dividend, but lose in market value if the stock price goes down. Also, there are some pitfalls. For instance, if a $50 stock is paying a $2 dividend it is yielding 4%. But, if that company falls on bad times and the stock price drops to $25, then the stock would be yielding 8%. Temporarily anyway. The company is quite likely in trouble and may not be the best investment, despite its 8% yield. (This is commonly known as a value trap)

Whether or not a stock pays a dividend is just one component of the stock picking process. It is important to balance your strategy with other fundamental and technical analysis before you make your buying (or selling) decision. I do like dividend paying stocks, and lean towards larger, established companies with long histories of paying (and increasing) their dividends. So, do your homework and speak to your Financial Advisor about what would be best for you.

 

 

*http://www.wsj.com/articles/SB10001424053111904103404576558993216520896

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

 

Gavin Chinn, CFS* Financial Advisor

Check the background of this investment professional on FINRA’s BrokerCheck.

An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.

“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”

Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.

So what is Gavin’s vision for his dream retirement?

“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”

When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.

Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

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