06 Jul Are dividend stocks a good bet even during a market downturn?

Q. All my stocks are down except for a few, but they all increase their dividends each year. Why don’t financial advisors recommend dividend stocks more? They are reliable income even if the share prices go down.
— Mighty investor

A. Reliable income is a good thing, especially when the stock market isn’t doing too well.

And really, any time you invest in stocks, the dividend should be an important part of the consideration.

Here’s what you should know.

At its core, stock ownership is a small share of the company and those regular cash dividends represent net profits returned to you, the owner, said Peter Hoglund, a certified financial planner with Wealth Enhancement Group in Warren.

“Some companies choose not to pay out a dividend, or pay very little,” he said. “Whether from low profitability or from a strategic decision of reinvesting those profits back into the company, no two decisions are the same and represent the significant differences of industries and companies.”

High growth stocks have grown partially due to reinvesting their profit rather than paying it out to their shareholders, he said.

It’s important to note that dividends are never guaranteed, unlike interest from a bond.

While it’s true that many large companies may have long histories of paying, or even raising their dividends over time, Hoglund said, but that can always change and may leave investors scrambling.

“Also don’t be too swayed by recent market returns – the first half of the 2022 has been particularly challenging for the majority of the stock markets but over a longer time horizon, holding stocks that pay dividends as well as those that reinvest their profit may be most prudent,” Hoglund said.

He said investing heavily in stocks that focus on dividends may make your portfolio unintentionally more tilted toward some sectors such as utilities, energy and financials), and you may miss out on others, such as technology, healthcare and consumer goods.

“This year has been hard on stocks, particularly those that have been ‘high growth’ in the recent past, but also many that are more stable dividend paying,” Hoglund said. “Consider viewing stocks in terms of ‘total return,’ where the dividend is a portion of the return of your investment and the market price change is another. Together, these components make up the total return of your investment.”

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This story was originally published on July 6, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.