Not all stocks pays dividends. Most big companies pays dividends. Any company may decide to increase or decrease their dividends at any time.
Stocks pays dividends as an incentive to shareholders to hold their stock. Most companies pays a portion of their earnings as dividends. However, some companies may borrow cash just to pay dividends. Thus, some dividends can be removed or decreased when company run out of cash.
- All 30 Dow Jones Stocks Pays Dividends
- More than 400 of the S&P 500 Companies Pays Dividends
Usually, mature companies with little to no growth pays dividends. While growth stocks tend to not pay dividends at all. Big companies pays dividends since they usually have lots of profits and there is no opportunity to find new customers.
In fact, all 30 Dow Jones companies pays dividends. Companies on Dow Jones is already big that expansion are very limited. These companies tends to be stable since they are so big that they could buy new competitors if they choose to do so.
Why not all stocks pay dividends?
Dividends is money paid from companies to stocks. When a company choose to pay dividends, their cash would be decreased. A company may choose to use that cash other than paying dividends.
Instead of paying dividends, a company may choose to invest cash in order to grow the business. They could hire more workers, buy more buildings, acquire smaller companies, or invest in future business projects. This is done to grow the business and increase profits in the future.
Also, some companies may have a lot of debt that they need cash to avoild getting bankrupt.
Most companies that do not pay diviedends are growth stocks. They choose to invest profits back into business in order to grow the business. In the future, they could grow profits.
How many stocks pays Monthly dividends?
Some of the stocks pays monthly dividends. However, this is very rare. Most companies that pays dividends do so every 3 months. Monthly dividends can be great since it can be a consistent stream of income.
Do all Preferred Stocks Pay Dividends?
Preferred stocks are very rare. For the most part, most of the stocks are common stocks. Preferred stocks are investments something in between a bond and a stock.
Not all preferred stocks pays dividends in a year. A company may choose to postpone dividends on a preferred stock. For example, if a preferred stock pays $1 on dividends, they can choose to postpone dividends this year and pay $2 instead or more the next year.
Preferred stocks are not mandatory to pay dividends. On the other hand, bonds are required by law to pay dividends.
Is higher dividends better?
Dividends that are sustainable typically ranges from 1 percent to 5 percent. If a stock pays more than 10% dividends, high risk or seasonality in revenues. In any case, check the balance sheet to check if they have enough cash to pay dividends and pay debts.
Usually, high dividend yield comes with high risk. But sometimes, it may be an opportunity. However, buying a stock solely for a 10% plus dividends usually does not work out. Personally, I tracked 10 stocks that pays dividends of above 10%. After a year, all of them have cut their dividends and share price have declined more than 30%.
Of course, 10 stocks is very little number of stocks to track. Personally, I consider dividends of around 5% a high dividend yield that is sustainable.
Advantages and Disadvantages of Dividend Stocks
Advantages
- Consistent Income
Dividend investing provides you a consistent income. No matter when stock go up or down, dividend income keeps coming. Also, dividend payments can be raised every year. Thus, more income.
On rare occasions, like recessions or unexpected happenings, great companies can cut or remove their dividends entirely. The good thing is that companies who recover can start paying dividends again.
It’s like a savings account that gives you cash. Instead of monthly interest, dividends are paid quarterly most of the time. The advantages is that dividends can pay 4% or more while savings account only pays less than 1%.
- Opportunity to grow dividends
Great companies grow their dividends as their business expands. When a company has more profits coming in, they may add more dividends. They may raise their dividends by 5% every year, which seems nothing. But over the long run, dividends could double every 10 years.
Also, you may have the option of reinvesting dividends. That is, buying more stocks using dividend income. For example, if a person receives $500 worth of dividends, he or she may have the option to buy more stocks using that $500. Thus, more dividend income in the future.
- Peace of Mind
Knowing that a stock actually gives you a source of income can give peace of mind. A person can be less worried if stock will go up or down since money is flowing in through dividends.
Without dividends, it is hard to hold a stock if it is down by 20 percent. But with dividends, stocks may still pay the same amount of dividends even if the stock is down. Thus, no need to worry on price swings in the market.
Disadvantages
- Limited Options
Focusing only in dividends can leave your portfolio not diversified. Dividend is a great way for beginners to start investing. However, focusing only on dividend stocks can limit options.
Stocks like Amazon, Facebook, Tesla, and Google do not pay dividends. You may miss out on some great companies just because they did mot pay dividends.
- Limited Return
Most companies that grows fast do not pay dividends. Growth stocks needs cash to expand to their business that they cannot afford to pay dividends.
High dividend stocks only pays 5 percent in dividends. Most stocks that pays more than 10 percent in dividends are usually more risky.
On a bull market, growth stocks usually outperforms dividend stocks by a wide margin. On bear markets, dividend stocks can have lesser declines compared to growth stocks.
- Limited Growth
Most dividend stocks have limited growth. Companies pays dividends since they do not have much opportunity to grow their business. Also, dividend stocks tends to be mature companies. If a company already reached its target market, how could they expand their business?
After all, it is harder to grow revenues from $200 billion to $400 billion than to grow from $1 billion to $2 billion. However, they provide the same return, that is, 100%.
The Verdict
Dividend investing is a nice place to start. It provides a sense of security and confidence for beginner investors by receiving consistent income. However, focusing only on dividend stocks may provide limited upside and little diversification.
It is important to invest in businesses / stocks that you have some idea about.
The best way to learn how to invest is through experience. That way, you can learn from mistakes and actually know what works and what does not works.
The way for beginners to gain experience, and not risky at the same time, is by starting with little money.
Investing little money allows a person to be more comfortable and makes investing mistakes much less costly. As time pass by, you will just become a better investor with more experience.
Warren Buffet started investing when he was 9 years old. By the time he’s 20, he would have learned more. By the time he was 30, he would have learned more and more.
It’s never too late to start.