No meme stocks in this section. Why’s that? Dividend stocks are making a comeback.
ELI5: What are dividends?
Dividend stocks at the end of the tunnel
During the pandemic, companies were forced to preserve cash by suspending/lowering their dividends. With the economy recovering and companies emerging in a stronger position, companies are once again distributing cash back to investors.
- Increase dividends: Dividend-paying companies increased their payouts by over $20b in the first quarter of 2021 – the largest increase since 2012.
- Buyback stock: US companies bought back over $500b worth of shares this year, the most in 22 years.
The dividend frenzy isn’t likely to slow down anytime soon either – banks are set to resume paying dividends on June 30 after being forced to stockpile cash during the pandemic. The economy is improving and investors are pouring into dividend-paying stocks again.
Money flooding into dividend stocks
Not everyone is a fan of dividend investing. It’s tax inefficient, and dividends can have negative impacts on the company. In some cases, management teams prioritize maintaining dividend payments — which could lead to bad decisions like:
- Taking on more debt to fund dividends.
- Using cash to pay dividends instead of funding profitable investments.
Whether you like them or not, returns of dividend stocks have been hard to ignore: Dividend aristocrats, 65 S&P 500 companies that have increased their dividends every year for the last 25 years, is up nearly 17% this year — beating the broader market for the first time since 2018.
Investors: Not your typical growth company
Companies that pay dividends are often lower-growth, mature companies. Unlike your Teslas and GameStops of the world, these companies:
- Distribute excess cash back to investors instead of reinvesting back into growth.
- Have slower stock appreciation than growth stocks.
For many investors, these stocks are an important strategy for building a steady stream of cash flow. With the US economy expected to grow 6.4% this year, the outlook for dividend-paying stocks is looking attractive.
Some of the highest paying dividend ETFs:
- Global X SuperDividend ETF (NYSE:SDIV): 8.70%
- VanEck Vectors BDC Income ETF (NYSE:BIZD): 8.16%
- iShares Emerging Markets Dividend ETF (NYSE:DVYE): 7.82%
