Stocks that provide dividends are an excellent way to build long-term wealth. Not only do dividends provide investors with regular income, but dividend stocks can also help investors weather market volatility. How? Whether the markets are going up, down, or sideways, dividends provide investors with a steady income stream.
Having said that, while dividends are usually paid out quarterly, at the discretion of the company’s board of directors, they can be raised, cut, or eliminated.
Not all dividend stocks are created equal. As a result, there are a number of factors investors need to consider when looking at dividend stocks.
Dividend yield is one of the most important factors to consider when investing in dividend stocks. It might be tempting to just invest in a stock with the highest dividend yield, but there is a risk/reward trade off when it comes to dividend-yielding stocks—the higher the yield, the greater the risk.
Stocks that provide an annual dividend of 10% or more tend to be very risky. Because they are risky, there is a greater chance the dividend could be cut—or worse, the share price could plummet. This means investors lose out on dividend growth and capital appreciation.
History is another important factor to consider. Look for stable companies that have a long history (five, 10, or even 25+ years) of both paying an annual dividend and increasing that dividend annually. Those stocks that offer annual dividend growth as part of their corporate culture are more likely to continue that trend.
The best way to determine whether or not a company can continue to provide an annual dividend and raise its yield is to look at the company’s free cash flow. Free cash flow is the amount of free cash, or money left over after it pays for operations and necessary capital expenditures. The more money a company has in the bank, the greater the chances are that it can sustain or increase its high dividend yield.
A High-Yield Opportunity to Think About If you’ve been paying any attention to the world of finance, the name “Goldman Sachs” should sound familiar. As one of the largest investment banking enterprises in the world, Goldman Sachs Group Inc (NYSE:GS).
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If You Want to Earn a Double-Digit Yield, Read This In today’s market, the No. 1 reason to consider a double-digit yielder is obviously to collect its oversized dividends. On the flip side, the main reason for investors to stay.
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This Dividend Stock Offers More Than a Dividend If an income investor wants to earn more than just dividends, then they should seriously consider adding Northrop Grumman Corporation (NYSE:NOC) to their watchlist. As a defense contractor, Northrop Grumman isn’t really.