Dividend Basics

Conventional wisdom used to suggest that dividends and the stocks that paid them were for retirees. Not so — they can serve all investors well, even young ones. Indeed, researchers Eugene Fama and Kenneth French studied market data from 1927 to 2014 and found that dividend payers outperformed nonpayers, averaging 10.4% annual growth versus 8.5%. That may not seem like a huge difference, but if you invest a single $10,000 sum for 25 years, it will grow to $76,868 at 8.5% annually and $118,639 at 10.4% annually — a big difference. Better still, dividend-paying stocks tend to lose less value during market downturns. Here are some things to know about dividend investing:

• Don’t assume that the highest dividend yields you can find are always the best bets. Some extremely high yields indicate companies in trouble — because when a stock price falls, its dividend yield rises — while others are merely due to a healthy company having a lot of excess cash.

• Favor dividends that are growing at a good clip. Growing companies tend to increase their payouts over time, and a 2% dividend yield from a dividend that’s been growing by around 10% annually can be a better buy than, say, a 3.5% yield that’s been unchanged for years.

• Assess the payout ratio, which is the amount of the annual dividend payments divided by earnings per share over the year. It tells you how much of earnings is being paid out in dividends. A high number, such as 90% or more, means there isn’t much room for growth; it might even mean the dividend isn’t sustainable and might be reduced.

• Look a company’s big picture beyond the dividend, too. Favor highquality businesses with little debt, ample cash and growing sales, earnings and profit margins. It’s also promising if a company has been paying an uninterrupted dividend for many years. McDonald’s has been paying dividends since 1976, Coca-Cola began in 1920 and York Water hasn’t missed a dividend payment in over 200 years!