Some people may see the stock market as nothingmore than a speculator's game. You havejust as much chance of losing money as you domaking it. While it's true that the market can beunpredictable at times, this view is really only supportedif you judge a stock by nothing more than itsprice alone. If you look a little deeper, you will findthat dividends—a portion of a company's profit thatis paid out to its shareholders—also makes up astock's total return value.
A stock's total return refers not only to its pricemovement over time, but also to the dividend it paysand any growth in that dividend. The decision ofhow large a dividend will be—or whether a companywill pay one at all—is made by the company'sboard of directors. Large, mature companies aremore inclined to pay dividends, while smaller companiesreinvest their profits to continue growing.Distributed in check form, investors can also purchaseadditional shares with dividends through aprogram known as a dividend reinvestment plan,which many companies offer.
Hedge Inflation Growth
In addition to paying a dividend, some well-managedcompanies have the ability to increase that dividendas their cash flow or earnings grow. In fact,there are many companies that have a long history ofincreasing their cash dividends annually. As an addedadvantage, companies that increase their dividends atabove-average rates help investors limit the damagingeffects inflation can have on investments.
When discussing the total return for a stock, it'simportant to take into account things that couldadversely affect that return as well. The rising cost ofliving that results from inflation is really in directcompetition with the return you're trying to get fromyour investments. By purchasing stock in companiesthat pay a steady dividend, you're basically hedgingagainst the effects inflation will have on your earnings.In a best-case scenario of rising dividends, youmay even be able to outpace inflation.
Find the Right Stock
Companies that actually pay a dividend—muchless increase that dividend regularly—fall in theminority. Current estimates show that about one thirdof companies offer any dividend at all. But don't bediscouraged by that statistic. Dividend-paying companies,and especially those that regularly increase dividends,are generally well-managed and, therefore,offer good total return opportunities to investors.
When you're looking to buy stocks, choosing theright one can be a tough decision. However, if youcarefully study and look beyond just the market priceand current economic and market conditions, you canfind many opportunities to help build a healthy portfolio.Keep in mind the return and principal value ofan investment in stocks fluctuate with changes in marketconditions. Upon redemption, it may be worthmore or less than the original investment. Talk toyour financial consultant today to help identify thosestocks that are positioned to pay you more.
Joseph F. Lagowski is vice president, investments, and a financial
consultant with AG Edwards in Hillsborough, NJ. He welcomes
questions or comments at 800-288-0901, or visit www.ag
edwards.com. This article was provided by AG Edwards & Sons,
Inc, member SIPC.