If you're looking for a simple way to give your portfolio a little boost, dividend-paying stocks can help. Dividends are periodic payouts of earnings that some companies share with investors—like a little bonus on top of regular returns.
What makes some companies so generous? Paying dividends is a good way to attract investment dollars. Often, firms that do it are big and stable, so they can afford to share the wealth—and paying a dividend is one way of showing that off.
Not only does that mean a little extra cash in hand for investors, it can also help take the pressure off relying on returns alone. Even if prices are going down, a company may continue paying dividends. And if you reinvest those dividends, you can potentially more than make up for short-term losses.
So, why not invest all your money into dividend-paying stocks?
The downside is those companies are usually not expecting the heady growth you might find with a smaller or newer company. So if you invest exclusively in dividend payers, you could miss out on potentially big wins.
Dividends are also more common in certain sectors, like utilities and finance, while a diverse portfolio should include a range of sectors.And remember, dividend-paying stocks are still stocks. Even though they can produce income like bonds, they're not considered as safe. For one thing, companies don't have to keep paying dividends. They can lower or stop payments at any time. For another, their prices can still drop with the rest of the market.
You’re best off making dividend investing part of a strategy that includes a diverse mix of stocks (small and large, U.S. and foreign, and in varied sectors) and corporate and government bonds. You can buy individual dividend-yielding stocks or invest in funds that include several of those stocks. But whatever stocks you pick should be a good fit for your portfolio overall, regardless of whether they pay dividends.