The dividend-paying stock has long been a mainstay for those
living on a fixed income. But these vehicles have been viewed as
contrary to the temperament and long-term growth goals of young
investors. After all, why invest in a stodgy utility when that
money could be socked into shares of the latest highflier? The
answer is that for every Google (
) or Apple (
), there is a Pets.com, the poster child of the dot-com bubble.
The financial crisis has put a new shine on the stability
offered by dividend-paying stocks. No longer just for widows and
orphans, dividend-paying stocks can be powerful tools for those at
the start of their investing life.
"Young investors have a tool that's available to them only when
they're young: compound interest," said Sam Stewart, founder and
chairman of mutual fund house Wasatch Advisors.
The same logic that underpins investing in any retirement
fund--namely that $1,000 will grow exponentially over the course of
a few decades--applies to dividend investing. But dividend-paying
stocks carry the added benefit of providing real income. A dividend
is cash in the pocket. That money can be then used to reinvest in
the company through a dividend reinvestment program or to purchase
This is not to suggest that dividend-paying companies don't
deliver capital appreciation. Data provided by Sit Investment
Associates shows that from December 1973 through December 2010
non-dividend paying S&P 500 stocks gained 2.3 percent per year,
while the index's dividend-paying components clocked in an average
yearly return of 9.2 percent. What's more, from 1930 through 2010,
dividends accounted for more than 40 percent of the S&P 500's
Experts say that although there's an exception to every rule,
dividend-paying companies are generally more stable than their
non-dividend paying peers. That's because the dividend payment
itself--particularly a growing dividend--is a strong indicator of a
company's future financial health in an era of inscrutable
"Companies can fake earnings, but you can't fake a dividend,"
said Rob Isbitt, chief investment officer of CWM, a registered
investment advisory owned by Carson Wealth Management. "A dividend
is cold hard cash. Companies have to pay it out and they can't pay
it with money they don't have. That's the beauty of a dividend.
But how do young profit seekers choose a dividend-paying stock?
Roger Conrad, editor of
Big Yield Hunting
suggests tried and true methods that have served investors for
"Look for businesses that have a transparent growth trajectory,"
he said. "For example, it's easy to see how a major oil company
will grow earnings over time because it's tied to growing energy
Investors should also prioritize a company's history of growing
its dividend over the dividend yield itself--in fact a dividend
yield of over 5 percent should serve as a red flag. Avoid companies
with substantial debt and a high payout ratio. Companies with a
payout ratio of over 60 percent may not be reinvesting enough into
the company's growth.
Young investors without the appetite or know-how to sift through
a wide universe of dividend payers may be well served by a
dividend-focused exchange-traded fund (ETF). A number of ETFs, such
as iShares Dow Jones US Select Dividend (
), provide investors with one-stop shopping for dividend-paying
But those who do wish to select individual stocks have a broad
array of growth-oriented companies available to them, according to
Paul Hogan, portfolio manager of FAM Equity-Income (FAMEX). The
technology space, a favorite haunt for young investors, boasts a
growing stable of dividend-paying names such as Microsoft (
) and Cisco Systems (
). Even up and coming semiconductor firms Xilinx (XLNX) and
Microchip Technology (MCHP) pay dividends. Furthermore, many of
these technology companies have extensive operations overseas,
providing young equity-income investors with exposure to fast
growing emerging markets.
But even the most compelling argument can fall upon deaf ears.
Wasatch's Stewart notes that the real decision facing youth isn't
whether to invest in a dividend-paying stock, but rather to invest
at all. When faced with the choice of investing or spending, young
potential investors often choose instant gratification.