C. David Petrucci Financial Article

July 2003 Issue --> Financial Article

The Value of Dividends

By: C. David Petrucci

Often overlooked, dividends can add substantial value to the return on yourequity portfolio. Many investors view dividends as a source of income ratherthan as a strategy to improve the total return of their portfolios; however,dividends can provide a boost to returns and can help lessen the impact ofmarket declines.

What are Dividends?
When a company makes a profit, the board of directors decides whether toretain those profits for investment in the company's future growth or to payout all or a portion of the profits to shareholders in the form ofdividends. As a common stock shareholder, these dividends are notguaranteed, but a preferred stock shareholder's dividends may be.

What to Expect
Dividends can be paid monthly, quarterly or semi-annually. Each cycle, theboard of directors declares if a dividend will be paid and how much thatdividend will be. The stated dividend amount is the amount per share thatwill be paid to shareholders who own the stock as of a certain date.

The value of the dividends is most clearly illustrated by a stock's dividendyield, which is the percentage of the market price of a security that youreceive through dividends. For example, if you own shares of stock ABC thatare currently worth $50 and stock XYZ that are $100 and each stock pays anannual dividend of $1, ABC's dividend yield would be 2% and XYZ's yieldwould be 1%. In this example if you reinvest dividends, or purchaseadditional shares with the dividends you receive, you would earn a return of2% and 1% for investments in ABC and XYZ, respectively. This is in additionto any return earned through share price appreciation. Alternatively, thisdividend yield may soften declines in share prices. In this same example, adecline of 2% in ABC's share price would be offset by its dividend payout.

Some investors view dividends as a source of income. This can be aneffective strategy for investors looking to generate income from theirinvestments, but because dividends are not guaranteed or fixed, there may bealternative investments that better meet this goal. Another strategy forusing dividends is to increase the total return on your investment byreinvesting the dividends.

Historically, stocks have averaged a dividend yield of 3.48%, as measured byS&P 500 over the period 1926-2002. While the dividend yield of any singlesecurity may vary over time, this long-term average has had a significantimpact on total return. For example, if you had made a hypotheticalinvestment in the S&P 500 of $10,000 at the beginning of 1982, thisinvestment would have grown to $123,100 by 10/31/2002 if you reinvested alldividends; however, this same investment would have grown to just $62,300 ifyou had taken the dividends as cash.

While dividends are frequently used as a source of income, their power as aperformance booster for total return is often overlooked. Consult a trustedfinancial professional to see how dividend-paying stocks would fit into yourlong-term financial plan.

C. David Petrucci, CFP®, is an Associate Vice-President-Investments andWealth Management Specialist with Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is amember of the New York Stock Exchange, Inc. and SIPC.

800.634.0072
cdpetrucci@leggmason.com
www.davidpetrucci.com

All data provided on this website is to be used for information purposes only. The information contained on this website and pages within, is not intended to provide specific legal, medical, financial or tax advice, or any other advice, whatsoever, for any individual or company and should not be relied upon in that regard. The services described on this website are only offered in jurisdictions where they may be legally offered. Information provided in our website is not all-inclusive, and is limited to information that is made available to and such information should not be relied upon as all-inclusive or accurate.

Bookmark this page now...

The Value of Dividends by C. David Petrucci

Stumble It!

Other Financial articles enjoyed by our readers.

The Financial Freedom Notebook
by Alexis Martin Neely

Five Reasons to be Skeptical About Your Finances
by Al Jacobs

The Juggler’s Approach to Wealth
by Jim Bunch

Here's a Taste of What You'll Get With Your Subscription...

Each month you'll have access to a new issue of the online magazine that is full of fantastic resources and help from the experts that will give you motivational training, as well as the inspiration, and education that you need to Live the Story of Your Dreams!

Weekly doses of "feel good" and practical self-help tips with The Chronicles eZine…

Live Access to the Top Movers and Shakers in the world twice a month through the Real Life Legends Teleseminar Series...

It's all completely FREE and you can unsubscribe at any time!

	Click Here with questions or comments about this web site. © Copyright 2003-2010 . Healthy Wealthy nWise. All Rights Reserved. 205 W. Liberty St., Ste. 203, Charles Town, WV 25414 304.725.2502
Home \| Affiliates \| Current Issue \| Contact Us Privacy Policy \| Terms of Use \| Subscriber Agreement Questions & Tech Support