One benefit of the stock market downturn is stock prices for companies that pay consistent dividends are down and the dividend yields are up.
A dividend is a payment the company makes to its owners (stock holders)—allowing them to participate in the profits of the company.
In a time before the Tech Bubble of the late 1990s, investors used to determine the value of a stock primarily on the dividend the company was paying and the dividend investors expected the company to pay in the future. The higher the dividend the company paid, the more the stock was worth. The lower the dividend the company paid, the less the stock was worth.
Although valuing a stock based on its dividend may have fallen out of style for a while, let’s take a look at some of the benefits of investing in stocks with high dividend yields versus investing in high growth stocks.
Growth vs. Dividends
Growth stocks are the sexy stocks in the stock market.
You never see the stodgy utility companies that pay great dividends on the covers of magazines or as the topic of conversation on the trendy blogs. Nope, instead you see high-flying stocks like Google (GOOG), Apple (AAPL) and Research in Motion (RIMM).
After all, stocks that can appreciate a few hundred percent in a year are the stocks we all want to be in on, right?
Growth stocks are great investments when the market is growing. Everyone is bullish on the market, and growth stocks keep rising higher and higher. Unfortunately…
…growth stocks are typically the first to suffer during bear markets. Because of their inflated prices, growth stocks have farther to fall when the rug gets pulled out from under them.
Stocks that pay dividends, on the other hand, tend to do a little better during bear markets. While the value of dividend paying stocks will most likely decline during a bear market as well, the company behind the stock should still continue paying a dividend.
Just like owning a rental property allows the owner to collect regular rent payments, owning a dividend paying stock allows the owner to collect regular dividend payments. Dividends also currently enjoy preferential tax treatment. Until the end of 2010, dividends are only taxed at a 15 percent Federal tax rate—instead of at your regular income tax rate.
During bull markets when stock prices in general are rising, both growth-stock investors and dividend investors make money. During bear markets when stock prices in general are falling, dividend investors seem to do better than growth-stock investors.
5 Dividend Paying Stocks to Buy Now
If you react too quickly to the market bailout, you’ll continue to find the stock market a better place to lose a fortune than to make one. As you’ll discover, the new market leaders that will rise from the rubble will be driven by financially solid dividend-paying companies in undervalued sectors AND with no exposure to the credit crisis.
Your best move now? Invest in these five income stocks, and you could easily find yourself 35% richer in the next 12 months.