If you're like many investors, you're ignoring dividend-paying stocks, assuming they're too stodgy for you. Perhaps you're more attracted to high-flying growth stocks that could fly higher. If so, you're doing yourself and your portfolio a disservice -- because dividend-paying stocks are powerful portfolio enhancers.
Here's a look at five reasons you should consider adding some (or many) dividend-paying stocks to your portfolio.
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No. 1: Dividend yields top bank and bond rates
Let's start with dividend yields: These days, and for many years now, many stocks' dividends have easily exceeded interest rates offered by banks and lots of bonds and certificates of deposit (CDs), as well.
Consider that the national average interest rate for a savings account wasrecently 0.05%, while five-year CDs offered 0.34%. A five-year U.S. Treasury bond recently sporteda yield of 0.38%, while a 30-year Treasury offered 1.69%. Meanwhile, Coca-Cola's (KO -0.18%) dividend recently yielded 3.1%, and AT&T (T -0.76%) sported a hefty dividend yield of 7.1%.
No. 2: Dividends have advantages over annuities
Fixed annuities are an inarguably attractive option for many retirees: You hand an insurance company a big wad of money and in exchange, you can receive a regular infusion of cash for a specified period or for the rest of your life. The upside is clear: No more worries about the stock market crashing and shrinking your nest egg, and dependable retirement income. The downside, though, is that the money you spend for that income is... spent. Gone. It won't be there for your children to inherit.
With dividends, though, you can have your cake and eat it, too. As long as you've invested in very healthy and reliable dividend-paying stocks, you can be assured of regular income without having to sell any shares -- and when you pass away, those shares will remain for your heirs. ("Shares for Heirs!" -- a pretty good slogan.) With a $500,000 portfolio of dividend-paying stocks and an overall average yield of 3.5%, you're looking at $17,500 in annual income.
No. 3: Dividends offer a one-two punch
Not only will the example portfolio above deliver $17,500 in annual income -- but that income will increase over time, because healthy and growing dividend-paying companies tend to increase their payouts every year or every few years. If that 3.5% yield becomes 3.75% the next year, and 4% the year after that, you'll receive $18,750 and $20,000, respectively, in those years, and increasing sums beyond that.
But wait -- there's more! Those stocks paying you dividend income will also be increasing in value over time. A $50 stock, if it's tied to a growing company, will eventually be a $60 stock, an $80 stock, and a $100 stock -- and may split its shares occasionally, too.
No. 4: Dividends help you keep up with inflation
All those increasing payouts have a special benefit: They can help you keep up with inflation. Over many years, inflation has averaged around 3% annually, though there have been years of very high inflation and some very low-inflation years, as well. A 3% rate can cut the buying power of your money in half over about 20 years, which might make life difficult late in your retirement. But if your dividend income is increasing at a fast rate than inflation, those payouts will actually boost your buying power over time.
No. 5: Dividends can augment Social Security checks
Finally, dividend income is a powerful support in retirement when paired with Social Security checks -- in part because Social Security income is also designed to keep up with inflation. In most years, Social Security benefits receive a cost of living adjustment (COLA). You can get an estimate of your future benefits at the Social Security Administration website, but know that the average monthly retirement benefit check was recently $1,523, proving about $18,000 annually. If you've earned more than average over your working life, you'll get more than that.
Dividends aren't perfect -- because sometimes even good companies have to reduce, suspend, or eliminate their payouts. And the value of some dividend-paying stocks will shrink instead of growing over time. But if you spread your money across a range of promising, growing companies with strong balance sheets and competitive advantages, you're likely to well over many years.
Give dividends some serious consideration for your portfolio.
Selena Maranjian owns shares of AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
