The Quest for Investment Returns
There are two traditional ways of achieving investment returns. One method is through capital appreciation, such as an increase in stock prices. The second means is from income payments: dividends received from stocks and interest from bonds and other fixed income securities. Realizing return from the growth of investments became difficult after the stock market tanked in 2008. At the same time interest rates were the lowest in decades. Return from traditionally safe investments such as investment grade municipal and corporate bonds, certificates of deposit, money market accounts and treasuries were extremely low or non-existent. Where were investors supposed to go for growth and income?
The Advantages of Dividend-Yielding Stocks
One clear answer is stock dividends. Although many companies reduced or cut entirely their dividends during the financial crisis, most maintained their dividend. Many companies reinstated dividends and increased payouts as business once again improved. Stock dividends yield better returns in a low-interest environment than investment-grade bonds, CDs and government securities. And as a bonus dividend-yielding stocks offer the opportunity for capital appreciation.
Cash Choices
Most domestic companies issue dividends quarterly. The cash provides income to individuals relying on their investments to subsidize other revenue. Investors building their wealth can use the dividends to purchase other investments or reinvest the dividends and buy additional shares of stock.
Advantages of ETFs
Individual stock purchases are limited by the availability of cash and the time and effort needed to research and choose appropriate companies. Mutual funds and ETFs – exchange traded funds – do the work for you. Funds reduce the risk and volatility of individual stock investing by buying a quantity of securities. ETFs are mutual funds traded on the stock exchange just like stocks and bonds. There are a number of ETFs that seek out stocks offering dividends and with a history of dividend increases over a long period of time. ETFs buy a number of securities that remain in the fund. Most follow an index and are not actively managed. There are few buy/sell transactions. This reduces trading fees and expenses. The shareholder is not subject to capital gains taxes until the ETF is sold, assuming it is in a taxable account. ETFs can be traded throughout the trading day. Fund holdings are published daily.
Researching ETFs
The following financial websites offer ETF finders, performance data and additional information: Marketwatch, Morningstar, The Street, and Yahoo Finance. Invest in a high-yielding dividend ETF and reap the benefits of both growth and income. Growth results from increased stock prices and income from regular dividend payments.
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