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Question:


Why own stocks that pay a dividend?
-FinanceDude


Answer:


It’s hard to find safe investments that pay decent income these days. A money-market fund or bank certificate deposit is likely to pay less than 1 percent a year. Ten-year Treasury bonds pay about 2.5 percent a year, but unless you’re willing to tie up your money for that entire period, there is a risk to your capital; if interest rates go up, say due to rising inflation, the bonds could decline in value. The same goes for high-grade corporate bonds, although they pay higher rates than Treasury issues.
 
Many companies have stocks with dividend yields that are almost as high as, or in some cases higher than, the yields on their bonds. There is a risk that stocks will go down, of course, just as with bonds, so investors need to be able to hold for the long term, but stocks with high yields tend to be less volatile than other stocks, and there is also the likelihood, especially over the long haul, that the stocks will increase in value. And while shareholders are waiting, they can keep cashing those dividend checks.
 
Some investors, especially young ones who don’t need income and can stand some ups and downs in their portfolios, may find less to recommend in big dividend payers. They also may prefer to see the companies they own devote all of their earnings to growth and not return much or any directly to shareholders. But for investors who have been around the block a few times yet are still able to hold assets for long periods and are seeking income in combination with growth, it’s hard to beat the risk/reward balance that high-yield blue-chip stocks offer.
-Conrad de Aenlle



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