Odds and Dividends

January seems like an excellent time for reflection and change. Many a New Year resolution is made (and often abandoned) within the first month of the year. The act of replacing the old calendar with a new one must trigger some long-ingrained desire in humans to periodically ponder and, hopefully, act on improvement ideas. Personally, I abandoned making New Year resolutions long ago. Creating change in my life comes down to forming or destroying habits. Grand declarations of positive intentions to change just don’t work for me. There are more than a few of my good intentions paving that road to the nether realm. This isn’t to say that I have completely forsaken the January opportunity to make at least a couple of positive changes. What’s this got to do with odds and dividends you ask?

Odds

Weary of paying for multiple music streaming services, I decided to put all my song eggs into the Spotify basket. The cool kids (my teens) have told me that this is the way so Amazon prime music is out. Speaking of kids, the thought of actually owning music media (cassette tape, CD, or vinyl record) is as foreign a concept to them as is a payphone.

It’s still remarkable to me I can search for just about any song and add it to a streaming playlist. A long way from taping songs off the radio as a kid. Don’t judge me too harshly – I know some of you did the same thing (remember all those mix tapes you made?). I’ve shared a link to one of my Spotify playlists at the end of this article. Fair warning: the songs are all from the 90’s – a decade during which I listened to many, many hours of music.

Dividends

Concurrently but separately, last month’s review of our personal finances seemed like a good time to spend time evaluating how well our money is working for us. I’m a fan of reviewing the :”state of our budget” and finances on a monthly cadence. Doing so in January affords a complete look back on the prior year. Unfortunately, 2022 was pretty terrible. One of the very few bright spots was the income that came from dividend paying stocks and ETF’s. And, I intend to further bolster investments in dividend paying instruments moving forward.

To say the market has been volatile over the past year is like saying Michael Jordan was decent at playing basketball (another shout out to the 1990’s). Long-term investing means weathering the ups and downs and to rely on the historical success of the equity markets. Why not get paid along the journey? This might be another good time to mention that I’m not a financial professional. I’m simply a Gen X’er who is only now figuring out how to use music streaming services.

So what the heck are dividends?

Dividends are a way for companies to share their profits with their owners (shareholders…you and me). When a company earns profits, they can choose to either reinvest them back into the business or distribute them to shareholders as dividends. Companies pay dividends for a variety of reasons, including to attract and retain investors, to signal financial strength, and to distribute surplus cash. Think of dividends as a way for a company to directly return value to its investors.

There are two types of dividends: cash dividends and stock dividends. A cash dividend is a payment made in cash to the shareholders, while a stock dividend is a payment made in additional shares of stock. If near-term income isn’t a priority, investors may choose to reinvest those dividend payments as a key component iof their long-term financial strategy.

Does it make sense to invest in dividend paying instruments?

Dividends can be an important part of any investment strategy because they provide a steady stream of income to investors. In addition, companies that pay dividends are often seen as financially stable and committed to returning value to their shareholders. This can make them attractive to even more investors and result in a higher stock price.

Investors who are interested in dividends should pay attention to the dividend yield, which is the annual dividend payment divided by the stock price. Dividend yield is calculated by dividing the annual dividend by the stock price. For example, if a company pays an annual dividend of $4 per share and the stock is trading at $100, the dividend yield is 4%. The higher the dividend yield, the greater the return for the investor. However, it’s important to keep in mind that a high dividend yield may also indicate that a stock is undervalued or that a company’s financial situation is weak.

Another factor to consider when investing in dividend-paying stocks is the dividend payout ratio. This is the percentage of a company’s earnings that are paid out as dividends. A high dividend payout ratio can indicate that a company is committed to paying dividends. But it can also indicate that the company is using most of its profits to pay dividends and may not have much left over for growth or investment.

Are all dividends created equal?

Not really. As is the case with any potential investment, it’s important to consider multiple factors when deciding whether to invest in dividends paying stocks or ETF’s. Some of the critical considerations include:

1. Company financials: Look for stable, profitable companies with a history of consistently paying dividends.
2. Dividend yield: Consider the dividend yield as well as the company’s dividend history while keeping in mind that a high dividend yield can indicate that the company’s stock price is underperforming.
3. Market sector: Some industries, like consumer goods, tend to have a higher dividend yield when compared to other sectors.
4. Dividend growth: Companies that consistently increase their dividends over time can provide a growing source of income for investors.

It’s also important to consider the overall health of the stock market and the economic climate, as these factors can impact the performance of individual stocks and the ability of companies to pay dividends. This has been especially important during current volatile market conditions.

Investing in dividend stocks is just one component of a well-diversified investment portfolio. It may be a good idea to consult with a financial advisor to determine the best strategy for your specific financial goals and circumstances. It’s also worth noting that dividends are taxed as ordinary income in the US.

Odds and Dividends

Investing preferences are similar to musical tastes – there are a ton of options. I feel comfortable investing in both individual dividend stocks (INTC, MSFT) and in dividend paying ETF’s (VYM, SCHD). Not all investors will find the risk/reward proposition of investing in dividend paying instruments to their liking. Just as not everyone is going to appreciate my musical tastes.

Dividends can be an important consideration for investors looking for income from their investments. Just remember, it’s important to consider the company’s financial health, dividend history, and the tax implications of the dividends before investing. As with any investment, it’s always a good idea to do your own research and consult with a financial advisor before making a decision.

And now, please enjoy my flashback to 90’s greatness!

Written by: A. Reed Reviewed by: B. Holman