Although no one knows whichstocks will increase in valueand which will decline, it'scertainly true that the pricesof stocks will change over time.Fortunately, there is a way to help cushionyour portfolio: Invest in companiesthat pay a dividend to shareholders.
A dividend is a portion of the company'snet profit that is distributed to shareholders.A company's board of directorsdecides whether dividends will be paidand sets the price. Dividends can make abig impact on your total return, which isfigured out by adding the amount of thedividend to the price movement in thestock. For example, let's say you purchasea stock at $50 that pays a $2 dividendand the stock increases to $60 after 1year. Your total return would be 24%.$60 ending priceafter 1 year + $2 stock dividend ÷ stock's$50 purchasing price = 24% increase.
While all investors hope the stocksthey own will increase in value over time,sometimes market conditions and otherfactors cause a decline. Dividends canhelp provide ballast to a portfolio whenshare prices decrease. Let's say you purchasea share of stock for $50 and thestock's price eventually declines to $40.That's a 20% loss. Now, if this stock paidits shareholders a $2 dividend, you wouldonly lose 16% in the end. As you can see,dividends can help buoy your portfolio,especially in challenging markets.
When choosing dividend-payingstocks for your portfolio, take a goodlook at your current investment holdings.It is important to remember to diversifyyour holdings among a variety of industrysectors to prevent any one sector fromhaving a large impact on your portfolio'sperformance. Once you have identifiedareas where your holdings may needadditional investments, it's time to decidewhat individual stocks to purchase.
At this point, consider the company'sfundamentals. In other words, find outtheir vision and direction for the future,investigate their cash flow, and makesure they have a proven track record.After you add new positions to yourportfolio, meet with your financial advisorregularly. Companies can reduce oreliminate dividends at any time.
Dividends can help balance yourportfolio in changing market conditions,boost your total return in upswings, andreduce your losses in periods of decline.Talk with your financial advisor aboutdividend-paying stocks that may be agood fit for you.
is vice president,
investments, and a financial consultant with AG Edwards in Hillsborough, NJ. He welcomes
questions or comments at 800-288-0901 or www.agedwards.com/fc/joseph.lagowski. This article was provided by AG
Edwards & Sons, Inc, member SIPC.
Joseph F. Lagowski