Flat CD rates send investors seeking higher payouts from stock dividends
Share with others:
High-yield dividend-paying stocks used to be seen as risky investments.
That was before the economic downturn exposed other risks in the financial system that could be just as damaging, such as the heightened risk of inflation due to the rising cost of food and energy.
These days the average rate for a one-year bank CD has fallen to around 1 percent, whereas many of the dividend stocks listed on the S&P 500 are yielding at least 5 percent.
While dividend-paying stocks can be a great way to get a better payout than would be available in CDs or government bonds, there are pitfalls that come with investing for higher returns in the stock market.
"The underlying problem any time you invest in a stock is the price can go down even due to a short-term event such as fear," said Nancy Skeans, a partner at Schneider Downs Wealth Management in the Strip District.
"The search for income is driving people to look more at equities because they just aren't getting it from bonds, money market accounts or CDs because interest rates are so low," she said.
Corporations declare dividends to distribute a portion of the company's profits to shareholders.
Like it or not, dividend stocks may be one of the few high-yield alternatives for the foreseeable future.
Federal Reserve chairman Ben Bernanke has said that cash will likely yield close to zero percent interest until 2014. Although stock prices are not insured by the Federal Deposit Insurance Corp., stocks with solid dividend payments do offer some downside protection during times of volatility.
"High-quality companies not only offer attractive yields relative to cash, but also have the potential to grow their dividends over time, which should help keep up with inflation," said George Emanuele, a vice president and investment adviser at PNC Wealth Management, Downtown.
"Not only do dividend-paying equities offer an attractive income stream," he said, "but since 1926, dividends have accounted for approximately 44 percent of total return and dividend payers have outperformed non-dividend payers."
Some of the more well established companies that are paying dividends higher than bank CD rates are Johnson & Johnson (JNJ) with a current dividend of 3.5 percent; Verizon (VZ) at 5.3 percent; and Bristol-Meyers Squibb Co. (BMY) at 4.2 percent.
First Published February 14, 2012 12:00 am
