Happy Holidays fancy people! Ashley here, your resident financial novice, back for another week of asking Wela COO Eddie Goepp all my burning questions.
So I was reading about dividends the other day. I knew, generally, what they were and I remember that, for a long time, I thought that's how people made money in the stock market. Here's the definition of dividends from my Investing For Dummies book:
Dividend: a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
This led me to this week's question. Let's get to it.
Dividends sound awesome! Why don’t people invest all their money in dividend-paying stock?
You’re right, dividends are awesome! This is a great question because there are many people who do invest largely in dividend paying companies. Dividends are simply a distribution of a company’s earnings to its shareholders. This means that any company can choose to be a dividend payer, regardless of what industry they’re in. It’s a way that companies attract new investors and keep their existing investors happy.
The reason why most people don’t invest only in dividend payers is because most dividend paying companies don’t have high growth potential. So an investor with a high risk tolerance and high growth objectives may be more inclined to invest in a growth oriented company over a dividend paying company. Also, dividend payers are stocks, which fall on the growth side of the investment allocation. In order to get properly allocated, you’ll want to look at adding some bond exposure to your portfolio. Bonds act as a rudder in the storm…so when equity markets get volatile, bonds should be a stabilizer.
Bottom line: Dividend paying companies are great investments to have in your portfolio, but many investors will want to have exposure to more than just dividends.