Watch your Dividend Stocks Carefully

Filed in archive on February 9, 2006

I was reading some posts on the Dividend Guy blog site and it made me think about the fact that even with dividends we have to keep a close eye on the companies we own and their plans concerning raising or lowering them.

As with all investments, the closer you get to retirement, the less risk we should be willing to take.

Concerning dividends and relying upon them to be a large portion of your portfolio growth or retirement source of income, consider the recent tale of GM and what they did with there dividend.

On Tuesday of this week, they cut the dividend in half from $2 to $1. Just in this one case you can see that those that may have been counting upon this as a large source of predictable income, this is not good news.

GM is just a good lesson that while dividends will remain, overall a good strategy for your investments, they still involve a measure of risk.

One of the positives, beside fewer taxes on them for the last several years, is that in reference to the Standard & Poor's 500, they account for close to 40% of the returns on stocks. Now of course this will assume that you continue to reinvest them back into the same stocks, giving them compound growth.

Keep in mind that whenever you see figures referring to long-term stock-market returns, it figures that you are reinvesting all of the dividends. If you don't those figures drop accordingly.

Dividends are still a good investment considering that the most that they can be taxed at now is 15%.

One of the great benefits of dividends to investors is that it does give them control over how to reinvest them; no-one else can make that decision.

The big thing to keep in mind when you come across companies that pay out big dividends is that their strategy can backfire; once a dividend is put in place most companies are extremely reluctant to cut it. So in many cases historically, companies have held the dividend while the stock price gets decimated.
The whole point is that just because a company has paid out great dividends throughout the years, doesn't mean that you don't periodically check out its financials.

If you're counting as dividends to be one of the major components of your growth and retirement strategy, watch over them carefully like you would any other investment and adjust your portfolio as needed.