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Dividends are hot for investors (but never went out of style) | Retire on Track

Evan Guido

Some people view dividend payouts from stocks as a boring way to make a buck. But they’re really beautiful investments – if you buy the right equity.

Going back to 1930, the income from dividends averaged 40% of the total return from S&P 500 stocks through 2021. From decade to decade their contribution varies widely, from 67% in the 1940s, 44% in the 1960s and a whopping 73% in the 1970s to the mid-teens in the 1990s and 2010s.

As you might guess from the numbers above, dividends are important sources of stability when stock prices aren’t providing great returns. In September CNN Business reported that “dividend-paying stocks are in vogue again,” as “traders seem to be craving quality blue chips that offer steady (and often growing) dividends.”

Besides the income stream, dividends are good for other reasons:

• They provide you with more confidence in the company’s financials. You can’t pay dividends from fake cash.

• Increases in dividends are a vote of confidence by the company’s board about future growth.

• They provide more financial flexibility than buying annuities because you can buy or sell stocks at a moment’s notice while annuities are long-term contracts.

But not all dividend stocks are equal. The best ones to seek tend to combine long-term growth and increasing payouts. One well-known starting point for finding these companies is the S&P 500 Dividend Aristocrats list comprising stocks that have increased dividends annually for the past 25 years. There are lots of familiar names on the list, such as Walmart, and some less familiar ones, such as Expeditors International of Washington. Some of these companies are stronger than others, but the recent pullback in stock prices you’ll likely see some good candidates.

Be careful, however. Some investors are attracted to high yield – this is the percentage of the dividend relative to the stock’s current price. But those high yields can be because the stock’s price has dropped for a good reason, such as the company being in financial trouble. In these cases the company might cut the dividend, sending the stock further south.

Another caution is to avoid overpaying for a dividend stock. Valuation still matters. It’s hard to justifying paying a price-earnings ratio of, say, 30 for a company growing earnings 3% a year.

So always ask why a yield is so high, and do your homework on the dividend if that’s why you’re attracted to the stock. One of the best numbers to check is the dividend payout ratio, which tells you how much of the company’s earnings are going toward the dividend. The higher the number, the more the company is devoted earnings to payouts instead of growth initiatives or other options for using earnings. A lot of analysts want the ratio to be under 60%.

Also, look at dividend coverage, which measures the company’s ability to pay dividends out of earnings. This number is the company’s total net income divided by the total dividend payments. Total net income of $100 million divided by total dividend payments of $25 million means the dividend coverage is 4.0. Many analysts look for dividend coverage of at least 2.0.

In today’s market, it’s nice to have. But don’t toss out the rules of smart investing.

Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Drive, Lakewood Ranch, FL 34240.

This article originally appeared on Sarasota Herald-Tribune: EVAN GUIDO: Dividends are nice while waiting for stocks to go back up

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