Some investors swear by them. While others are wary of it and prefer to turn to so-called growth stocks. So what is dividend stocks (really) worth and what place should you give them in your portfolio?
There are two ways to make money in the stock market. You can do a capital gain by reselling your securities at a higher price than you bought them for. Or you can take it in your pocket dividends which are paid monthly, quarterly or annually depending on the company.
In the best of all worlds, it is possible to combine these two sources of return. For example, Air Liquide shares saw a price increase of 18% since the beginning of the year. And the company paid a dividend 2.95 euros for the same period.
But this is not always the case. Because the dividend payment is not systematic. Some companies prefer returning value to shareholders through dividend payments or share buybacks. While others reinvest the funds they have to continue their growth, explains Aldo Sicurani, General Delegate of the Federation of Individual Investors and Investment Clubs (F2iC).
A handful of companies do, on the contrary a dividend that has been continuously increasing for sometimes more than 50 years. So much so that they are now nicknamed the Dividend Aristocrats. Among the latter we find, for example, Coca-Cola, ExxonMobil, Allianz, Johnson & Johnson, Sanofi, Procter & Gamble and Walmart, the American mass distribution giant.
But how do we know if these high-dividend stocks are more interesting than so-called growth stocks, companies that reward shareholders by increasing their price rather than paying a dividend?
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To understand interest in dividends, we can look at the history of the CAC40. In its beginnings, on December 31, 1987, it stood as the flagship index of the Paris market 1000 points. He surpassed today 7200 points. Over the course of 35 years, the value of the shares in the index multiplied by 7.2.
If we now look at the CAC40 GR, i.e. the same index but taking into account reinvested dividends, we see that it reaches 21940 points. This is almost 22 times the value of the initial index. In the case of the CAC40, the consideration of dividends has made it possible to triple the performance for the investor, notes Aldo Sicurani.
It is therefore not surprising that investors often look for securities with high dividends. Some shares, such as Socit Générale, which offer a yield of 7.15%or even TotalEnergies (5.48%) are very popular among individuals, notes Aldo Sicurani.
For shareholders, these high dividends are often an opportunity to generate additional income. With a portfolio 100,000 euros invested in the long term by focusing on high dividend stocks, it is possible to generate income 6% of grossis around 6000 euros per year. This is not negligible, believes Aldo Sicurani. A big downside though: a high dividend yield and rising prices are very often incompatible.
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However, dividends are not a silver bullet. First, some stocks don’t pay a dividend, but they still do very effective, because the funds are used for business development. This is, for example, the case with most technology stocks, such as Amazon or Google, whose prices rose by or 56% AND 41% since the beginning of the year.
On the contrary, other companies are sometimes found captives too high a return that can affect their long-term performance. Shareholders don’t appreciate when the dividend goes down. It is often interpreted as a wrong signal on the financial health of the company, which may result in a drop in price. Therefore, the interest in share buybacks, which are less binding for the company, suggests Aldo Sicurani.
The dividend debate does not end there. Because from an accounting point of view, the dividend does not enrich the shareholder. In fact, on the day the stock’s dividend is paid, the stock’s price will fall by the same amount. In other words: dividends are neutral. It’s just another way to share the wealth with shareholders.
Some shareholders even believe that dividends impoverish them, since the amount received after taxation does 30% for securities account a 17.2% for an equity savings plan open for more than 5 years, it is less than the decline in the share price corresponding to the amount of the gross dividend, explains Aldo Sicurani. But in reality, if the stock held is of good quality, the price will often rise fairly quickly to its previous level within days.
So should we favor high dividend stocks or turn away from them? Dividends are a source of income that should not be overlooked. But shareholders must be primarily interested in the total return of the securityanswers Aldo Sicurani.
In other words: don’t be blinded by a high dividend. This is only part of the equation. For example, Icad offers a dividend of 12.33%. But it has lost 56% of its value over the past 5 years.
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