A primer on dividend paying stocks

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After saving for most of your working life, it’s time that your investments start working for you. One way to do this is to have some of your investments in stocks that pay out dividends, which are cash payments that are distributed  annually, semi-annually or quarterly. Before technology companies decided that they would reinvest all profits back into the company, most stocks paid a dividend. In most cases today, dividend paying stocks are lower risk and appealing for both younger individuals looking to generate income over the long haul and for people approaching retirement. Why? It’s because some of the profits are earmarked to be returned to shareholders – not for management to redeploy.

Dividend paying stocks may be good for retirees to consider because unlike fixed income, where the amount the organization agrees to pay back is set in stone, stocks that pay a dividend can increase in value over the time you are holding them. Regardless, not all dividends are the same.  Some dividends can fluctuate. For example, REITs and MLPs have a dividend that is selected every quarter based on earnings of the company, which fluctuate. If you are looking for steady income, you are likely not going to get it in this sort of company. High quality dividend paying companies are those that have an established track record of maintaining and increasing the dividend over decades regardless of what the economy is doing.

Dividend paying stocks that retirees should consider include:

  • Verizon (VZ)
  • AT&T (T)

These two well-established companies have learned to manage cash flow and boast very solid dividend returns. Unlike other utility stocks, they aren’t record high multiples, which means they have some room for upward appreciation. Verizon and AT&T are not your father’s telecom stocks. While they both benefit from the high margin plain-old-telephone business that generates a lot of cash, these companies are responsible for bringing large parts of America their mobile and home internet connections.

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