Given the current market volatility, safer income-generating
investments are increasingly being considered by smart investors
who want to reduce their risk in the stock market.
There was a time not so long ago that investors looking for a sure
thing would have T-bills and certificates of deposit (CDs) as their
dominant investment tools for a safe, usually healthy return.
But that's not the case anymore.
Gone are the days that a retiree can rely on Social Security,
Medicare, or a pension to pay for their retirement.
One of the problems is that the Federal Reserve continues to keep
interest rates at all-time lows in an effort to encourage borrowing
and to stimulate the U.S. economy after the recent recession of
2007 - 2009.
While this may help some businesses seeking capital for expansion
and encourage consumer borrowing for cars and homes, the record low
interest rates are having a negative effect on those who have saved
wisely for their retirement.
The low interest rates continue to encourage consumers to borrow,
and penalize those who have saved money over the years. With
interest rates so low, investors can't get a decent return in the
conventionally "safe" investments like a money market account, CD,
or even U.S. Treasuries.
So dividend paying stocks have become an increasingly attractive
option due to low interest rates.
The stronger companies in the S&P 500 offer an annual dividend
in the 3 to 7 percent range. Not only will you have the usually
consistent income from the cash dividends, but also you'll be an
Usually it's the better-performing companies that pay dividends, so
it's likely that you'll enjoy capital gains with dividend paying
stocks as well.
To be sure, a healthy dividend check is no guarantee that share
price won't stagnate, but dividend-paying companies are less
volatile than their growth-company counterparts and will move
higher with the major market indices and with increases in their
Dividends are money in your pocket, sent to shareholders. There's
no room for promises or accounting tricks. The dividend is paid, or
it isn't. That's a rock-solid certainty you should be so lucky to
find in all of your investments.
With the recent sell-off in stocks, there are many dividend stocks
yielding well above 3 percent annually. In the large cap arena
investors can look to
Verizon (NYSE: VZ
) and in the small cap arena check out
Ituran Location and Control (Nasdaq: ITRN)
United Online (Nasdaq: UNTD)
as places to start. There are other more growth oriented small caps
that have smaller yields but more capital gains potential as well.
As I wrote a few weeks ago, "...if you were buying stocks in the
last three months, shouldn't you be buying now when they're a heck
of a lot cheaper, and pay you more in the form of higher yields to
own them? You don't need to buy all the stocks you'd like to own
today, or tomorrow. But it would be 'risky' to not buy any at all."
Buy in tranches, a bit next week, some week after and maybe more in
November. Look to buy on days when everybody else is selling, like
this past Monday.
This will average out your cost, and give you the security of
knowing you don't have to pick 'the bottom' to cash in on great
dividend paying small companies.
Disclosure: Author owns shares of PFE, VZ