Why Invest In Stocks That Pay Dividends?

24 May 2023

The world is an unpredictable place right now which is resulting in a very volatile stock market. This does not necessarily mean that you should withdraw from investing in the stock market, especially if your monies are invested in long term contracts such as pension plans or investment policies. However, if you are nervous, now would be a good time to check that some of your money is invested in stocks that pay dividends. 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.

By investing in such a fund through a life company it takes away the responsibility of finding stable dividend paying companies through your own research. Fund Managers will screen dividend paying companies and will search for companies that pay a higher than average dividend yield. The fund manager will identify companies that have a good cash flow with the ability to continue to pay higher dividends in the future. The Fund Manager will also sell any shares where he/she feels the dividends may fall or the underlying fundamentals of the company are poor. Dividend-paying stocks also provide a way for investors to get paid during rocky market periods, when capital gains are hard to achieve. On the other side of this, dividend paying stocks do not have the same growth potential as growth stocks; however, they do have the advantage of consistent regular income, even if the capital appreciation of the stock is not as large.

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.

When you invest in a dividend paying fund through a Life Company the dividends are reinvested and used to purchase more shares. These newly purchased shares will also generate a dividend which means that the fund receives extra earnings. By doing this you are taking advantage of the power of compounding which is another reason that you should consider investing in this type of fund.

If you are considering investing in the stock market, you should always contact your local Financial Advisor.

Marie Carr, CFP® MSc BBS QFA RPA SIA is a CERTIFIED FINANCIAL PLANNER. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on marie@jfl.ie

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