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TheStreet Open House

After 30 Years, Stock Market Pendulum Tilting to Dividends?

Dividend payout ratio:

This is the ratio of dividends to earnings. Dividends are generally paid out of earnings. The company may pay some of these earnings to you as the shareholder and retain some to put back into the company. More mature companies tend to have higher dividend payout ratios.

  • Increasing dividend payout ratios are a sign of a company's strength and the management's belief it can continue making these payments. Otherwise, they would not increase the dividends.
  • Certain industries have historically paid higher dividends, such as utility companies.
  • Conversely, companies that cut dividends ratio usually indicate weakness. You want to approach these companies with extreme caution.
  • Exceedingly high dividend payout ratios may be too good to be true, so approach these with caution, as well.
  • Dividend yield:

    It represents the income from dividends divided by the share price.

  • This is the annual income the company indicates it will pay, based on the most recent dividend paid.
  • The yield will go up when the stock price goes down.
  • The yield will go down when the stock price goes up.
  • The yield can go up or down if the company changes the amount it pays out.
  • Tax implications

  • Under current law, qualified dividend-paying stocks are taxed at 15%, as opposed to a more common income tax rate such as 25% or 28%.
  • Qualified dividends are for stocks held for 60 of the 120 days before the dividend payment is announced. Otherwise, the dividends are taxed as regular income.
  • For those in the 0% to 15% income tax bracket, the tax rate on qualified dividends is 0%.
  • If you sell the stock, mutual fund or ETF at a profit, you may owe capital gains tax.
  • If you sell these investments at a loss, you may be eligible for a capital gains loss. That is used to offset taxes on gains from elsewhere in your portfolio.
  • The current tax law could change so pay attention to the legislative environment.
  • Dividend Reinvest or Cash

    Keep in mind you can use your dividend income to buy more shares of your investment, or you can have your custodian or broker pay the dividends in cash to you.

    Stock market volatility can be disheartening to anyone. Evaluate ways to cushion the roller coaster ride of stock price fluctuation with a steady stream of dividend income. Just as a landlord seeks to receive a positive cash flow from rent, an income and growth investor can seek dividend-paying stocks for positive cash flows.

    --By Scott Hughes, CFP, MBA, a financial planning advisor and president of Hughes Financial Services, LLC , in Herndon, Va., for AdviceIQ .

    Hughes Financial Services LLC, is a branch office of and securities offered through WFG Investments, Inc. (WFG). Member FINRA/SIPC. Scott Hughes is a Registered Representative of WFG.

    AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

    To subscribe to AdviceIQ's Rss feed for personal finance articles written by financial advisors and AdviceIQ editors, click here .

    Follow AdviceIQ on Twitter at @adviceiq.

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