Does it make sense to buy dividend paying stocks?
The short answer is yes.
• Historically, dividends have been a large portion of investment returns.*
• Companies have been terrible at buying back their own stock. If they give you a dividend you can decide whether to reinvest it in that company or a different one.
• Dividend stocks have higher risk-adjusted returns. From January 31, 1990 to April 29, 2016 the annual volatility of the Dividend Aristocrats index was 13.5% compared to 14.6% for the broader index according to Think Advisor.
• Dividends get preferential tax treatment in taxable accounts versus ordinary income currently taxed at a 39.6% maximum.
For tax purposes, common stock dividends are:
• Normally, tax-free for those in the 10% and 15% brackets.
• Taxed at a 15% rate for those in the 25% up to 35% tax brackets.
• Taxed at a 20% rate for higher income taxpayers whose income surpasses the 35% tax bracket.
At certain times (presently) the dividends on a company's stock can exceed the interest that the company pays on its bonds. As long as the company is in sound financial shape and you don’t need the principal in the event of a market downturn, you can get a better return with the potential of increased income (from dividend increases) without big increases in risk.
*From 1970 to 2012 dividend yield accounted for about two-thirds of real stock-market returns in major markets according to Credit Suisse.
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