Dividend-paying stocks belong in most investors’ portfolios, for the following reasons:
Current income: Stocks that yield, say, 2 or 3 percent or more these days have higher payouts than money market funds or Treasury bills.
Lower risks. In the 2000-02 bear market, stocks that paid dividends fared much better than companies that didn’t.
Signs of reality. Cash dividends indicate that companies really are making money, not “cooking the books.”
Signs of prosperity. Companies that pay dividends literally have more cash than they need. After paying for salaries, operating expenses, and so on, they have extra funds to pay cash to shareholders. Thus, dividends indicate that a company is well-managed and probably will continue to be profitable
Tax breaks. The 2003 tax law reduced the amounts taxpayers owe the IRS on dividend income. Most investors now pay only 15 percent to the IRS while investors in low tax brackets pay only 5 percent. This has made dividend-paying stocks more attractive.
