Dividend Stocks Vs. Stock Market

Stock markets like the New York Stock Exchange -- or NYSE Euronext -- offer a galaxy of different stocks to suit the needs of most stock investors. Some investors seek current income through high-dividend stocks, while others favor long-term capital gains and may avoid stocks that pay cash dividends. Stock market listings, both printed and online, always include a stock’s cash dividend yield, which is the annual dividend amount divided by the stock price. Dividend-paying stocks tend to be less volatile than shares that don’t pay dividends.

Dividends

Dividends are cash or stock distributions to shareholders. A dividend-paying company's board periodically declares a dividend payable to stockholders of record as of a certain date. Dividends are always paid out of retained earnings, which are the accumulated profits of a corporation. Cash dividends are usually paid quarterly, whereas stock dividends are occasional. Income-oriented investors favor stocks with a long, unbroken record of rising dividend payments. Many high-growth companies do not issue dividends, preferring to channel retained earnings into new projects and company growth.

Exchange-Traded Stock Funds

Exchange-traded stock funds are baskets of stocks that usually correspond to a recognized stock index. One such index is the NYSE Composite, which includes all companies listed on the exchange. You can buy a piece of the entire stock market by purchasing ETF shares. The dividend yield on the NYSE Composite ETF for 2012 was 2.54 percent. However, many ETFs specialize in dividend-paying stocks. One such ETF concentrating on stocks that consistently pay increasing dividends had a dividend yield of 3.70 percent for 2012.

Preferred Shares

Preferred shares also trade on the stock market. These are shares offered by some companies that pay high dividends but do not confer voting rights to shareholders. Preferred shares are senior to common shares but subordinate to debt when the proceeds of a liquidated company are distributed. A company must pay preferred stock dividends before it can issue common stock dividends. An ETF composed of U.S. preferred shares had a 2012 dividend yield of 6.02 percent. Preferred shares are strictly for income investors, as the share prices are very stable.

Dividend Reinvest Plans

You don’t have to buy shares on the stock market if the issuing corporation has a dividend reinvestment plan, or DRIP. An investor can buy shares directly from the issuer through a DRIP and can choose to have dividends automatically reinvested. Other advantages of a DRIP include the ability to own fractional shares and commission-free transactions. The price you pay for DRIP-purchased shares is usually a multiweek average of the stock’s market price. You can purchase preferred shares on the DRIPs of companies offering this kind of stock.

Resources (3)

  • Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market; Kelley Wright
  • Dividend Stocks for Dummies; Lawrence Carrel
  • Income for Life Dividend Secrets; James Tower, David Newcastle

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