Why Invest in Companies that Pay Dividends?
3 July 2022
As I am sure you are aware, global stock markets are going through a very volatile, mainly negative period just now. This is being caused by widespread uncertainty about inflation, interest rates, the war in Ukraine, the ongoing Covid problem and related supply chain issues.
That does not necessarily mean that you should withdraw from investing in the stock market, especially if your monies are held in long term contracts such as pension plans or investment policies. However, it does mean that you should consider ensuring that at least part, if not all of your equity holding is invested in companies that pay dividends to their shareholders.
High quality companies pay dividends consistently during all market cycles and not just in rising markets. You can invest in these companies directly by researching them yourself or you can invest in a fund that specialises in investing in companies that pay dividends. The majority of life companies in Ireland offer access to these types of funds through their pension, savings and investment policies.
Investing in such a fund through a life company takes away the responsibility of finding stable dividend-paying companies through your own research. Fund managers will screen companies and will search for companies that pay a higher than average dividend yield. The fund managers will also endeavour to identify companies that have a good cash flow with the ability to continue to pay higher dividends in the future. They will also sell any shares where they feel the dividends may fall, or that the underlying fundamentals of the company are poor.
Strong companies usually have enough free cash to pay dividends to shareholders even in times when company earnings are weak and stock markets are falling. Companies that pay dividends are generally thought to be financially stable and secure and a company which pays consistent and rising dividends is a company that has a healthy cash flow. In falling stock markets these companies tend to be less volatile when compared to companies that do not have the cash flow to pay dividends to their shareholders each year.
The dividends received by the fund are then reinvested into the fund and used to purchase more shares in dividend-paying companies. These newly purchased shares will also generate a dividend which means that the fund receives extra earnings. By doing this you are also taking advantage of the power of compounding which is another reason that you should consider using this type of fund.
As with all investment decisions you should contact a Financial Advisor before you proceed.
Sean Sweeney, QFA RPA is a Qualified Financial Advisor and Retirement Planning Advisor. You can contact him through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on sean@jfl.ie