Why I Like Dividend-Paying Stocks for Moderate-Risk Investors

 

SPDR S&P 500 ETF Trust 

          … JP Morgan Growth Advantage A 

                    … Fidelity Advisor Equity Growth 

                              …iShares MBS ETF 

Are you bored yet? For most of us, those words are just a meaningless string of symbols. They don’t stir memories, opinion, or most notably… optimism.  

Really, they are just names of some random mutual funds and ETFs. There is nothing special about them… at least nothing that can be inferred from their name. On a positive note, having mutual funds and ETFs in your portfolio is often useful for diversity.  

However, I’m a big fan of investing in individual stocks.  

I think investors with moderate risk tolerance can greatly benefit from holding dividend-paying stocks. 

Here is why: 

  1. Recognizable names promote confidence 
  2. There is less volatility, historically 

 

Why I think recognizable names promote confidence:

Walmart 

        … Lowe’s 

              … Apple 

                      … McDonald’s 

Those stock names stir thoughts, don’t they? 

Do you think about the long line at Walmart you had to wait behind yesterday? Perhaps you’re reminded you need to go to Lowe’s this weekend to buy that new light fixture? Maybe you think about how seemingly everyone you see has an Apple device attached to them? Or maybe you even begrudgingly think about how we eat wayyy too much McDonald’s.  

My point is, you have a level of familiarity with these companies. 

Familiarity promotes confidence.

Confidence promotes peace of mind.

Peace of mind promotes the ability to stick with an investment plan.

  

You watch these companies make money; you watch them innovate. Even if McDonald’s stock price goes down 30%, they are still slinging cheeseburgers out their drive through. You know that they are more than likely not going out of business any time soon. 

Not going out of business means that your investment isn’t going to $0. 

In my experience, I have found that investors with even just moderate risk tolerances feel confident with equity exposure when they hold strong individual companies as compared to mutual funds that register no optimism – even if it is a great mutual fund! 

 

Why dividend paying companies tend to be less volatile:

Well-selected, dividend-paying companies generally have stable and abundant cash flow. Their earnings are often growing, which gives them the option to return their profits to stockholders rather than having to invest it back into the business.  

Secondly, dividend-paying companies may have more manageable debt levels, giving investors more confidence. 

A third reason is that dividends are an unofficial commitment. Once a company starts paying a dividend, it is rare for them to take it away. It would be seen as an act of bad faith, and companies assuredly want to avoid that! 

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Dividend stocks aren’t right for everyone, but they can be great tools for moderate-risk investors to confidently gain exposure in the equity markets! Do your research and talk to your advisor to see if they might be right for you.