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The merits of dividend stocks have been drilled into the popular psyche in part due to prominent investors, according to a recent paper from the National Bureau of Economic Research. "In the end are you better off with that higher yield?" Zappia asked. Or does a company have have slower revenue and earnings growth? In that case, Zappia said that "most, if not all of, what you make on the stock could be the dividend" - AT&T and Verizon's high yields, but lousy stock performance, in recent years are an example.Ĭompanies that pay out distributions instead of using the cash to reinvest in their operations are another red flag, as are those that aren't growing but pay dividends nonetheless because investors expect them to, shoring up their stock prices. If so, he added, it can be a yield trap and the dividend could be cut or eliminated in the future. Is a company paying a high-yield dividend because its stock price is low due to weakening fundamentals in its business? he asked. Joseph Zappia, a principal and co-chief investment officer of LVW Advisors in Pittsford, New York, agreed that it is a mistake to lump all dividend stocks together. Hartford Funds found that companies in the second quartile of paying the highest dividend yields were the most likely to outperform the S&P 500 from 1930-2021. While not all companies with a high dividend yield are problematic, "investors should question why a company is willing to pay out so much more than its peers," the website said.

"A dividend value trap occurs when a very high dividend yield attracts investors to a potentially troubled company," it says. The lure can be dangerous, according to, a financial services website. The average dividend yield is historically 4.28%, according to DQYDJ, a financial website that cited S&P data.Ĭompanies that pay cash dividends despite headwinds can be seen as on more solid footing and "safer." But because higher interest rates raise the cost of borrowing and meeting interest-related expenses, companies that pay higher dividends can prompt investors to chase "dividend yield." Financial data website YCharts shows that after declining steadily starting in March 2020, when the pandemic hit, yields began ticking up this year and now average 1.69%. As both Hartford Funds and Morningstar noted earlier this year, companies that made big payouts in one or more years often don't in subsequent years.Ĭredit persistent inflation, rising interest rates and the end of the stock market's bull run.

Yet stocks with the highest dividend yields have historically underperformed those that either don't pay dividends or have lower yields during periods of rising interest rates. Those with the highest yield, reflected as the percentage of share price paid out as a distribution, would seem to be the most attractive to own longer term. Kantor, the chief investment officer and co-founder of XML Financial Group, indicated that rather than asking whether dividend stocks should be in a diversified portfolio, advisors should now be asking which kind. Reinvesting the distributions, rather than cashing the check in the mail, sets a portfolio up for greater compounding of wealth down the line - what Fidelity Investments calls a "safety net of stock investing." It's a mindset that makes particular sense to older investors concerned about the power of a volatile Wall Street and rising consumer prices to deplete their nest eggs more quickly than expected. The stocks pay out cash distributions quarterly or annually from a company's earnings, locking in some profit regardless of how they perform. But the shares aren't always a glistening addition to a retirement portfolio, and their tax rules can create costly traps.

Dividend stocks are a shiny new ornament for many financial advisors, especially those with older clients worried about maintaining income and spending power in uncertain economic times.