Traditional High Dividend Stocks

Market downturns can offer good opportunities for investors to buy dividend-paying stocks.

Dividend payments offer a way for companies to distribute a portion of their earnings directly to investors. Typically, new upstart companies reinvest earnings. Many older, more well-established firms choose instead to distribute earnings to investors. Stock dividends are important to many investors seeking stability and a reliable income from their investments. Several large companies have traditionally paid high dividends, making their stock an important part of many investors' portfolios.

High-Yield Stocks

When deciding to invest in a company for its dividends, it seems logical to just run down the list of available stocks and choose the one with the highest dividend payout. Unfortunately, very high dividends might be a red flag. Investors are risk averse, which means you have to pay them a higher rate of return on their money to get them to assume higher risk. Dividend yields that are too high may indicate underlying problems with the company, which could translate into lower future stock prices.

Benefits

Dividend-paying stocks offer investors several advantages over companies that do not distribute earnings in the form of dividend payments. As a group, dividend stocks have less volatile prices. Moreover, dividend payments offer investors a way to earn money right away without having to sell their stock to reap the rewards of growth. Finally, they offer a hedge against inflation, as many companies increase their dividends during times of inflation.

Leading Traditional High-Yield Stocks

There are a few industries that have traditionally high dividend-paying companies that also offer investors safety and stability. Tobacco companies, such as Reynolds American, for example, had a yield of almost 7 percent in 2010. Other traditionally high dividend-paying companies include Johnson & Johnson, Dupont, Kinder Morgan, Microsoft, Procter & Gamble, Conagra and Merck. Notice that all these companies are big, well-established firms that provide consumer staples products, which enjoy continuous consumer demand.

Preferred Stock

There are two basic types of stock a company can issue: common stock and preferred stock. While companies can pay dividends on common stock, dividend payments are not guaranteed. Preferred shares, on the other hand, do offer guaranteed payments. As a result, preferred stock behaves more like a bond than a stock. The price of preferred stock is much more stable, holding its value during market downturns. Moreover, if the company runs into trouble and has to liquidate its holdings, preferred stock owners receive preference over common shareholders when corporate holdings are distributed to creditors and shareholders.

References

• The Motley Fool; 10 Dividend Stocks for the Next Decade and Beyond; Todd Wenning; January 2009
• The Street; 7 Low-Risk, High-Dividend Stocks; Jeff Reeves; July 2010
• The Motley Fool; Preferred Stock Basics; John Rosevear; July 2007