Weighing the pros and cons of dividends

Mature, established companies often pay out dividends on their stock, which can become a great income stream for shareholders. Believe it or not, owning stocks that don’t pay dividends can provide several advantages too, depending on your financial situation. Let’s take a glimpse at both options as you consider whether it’s better to invest in stocks that pay dividends or those that don’t regularly issue them.

Advantages of dividends

Dividend-paying stocks provide a steady stream of passive income in the form of regular dividend payments — often quarterly, but it could also be monthly, annually, or irregular and random. With the power of compounding interest and the option to reinvest dividends back into the stock, this consistent income can help an investor build wealth over time. Regular dividends can be especially beneficial for investors who rely on their investments for income, such as retirees.

Larger, more established companies that have a history of stable earnings and cash flow are typically the ones that pay out dividends. These companies are mature and experience low growth, which can lead to capital appreciation in addition to the dividend income. These stocks also tend to be less volatile. Historically, dividend stocks typically outperform in a down market — although that market trend has reversed since the COVID-19 pandemic. However, dividend payments can partially offset any losses from market downturns too.

Advantages of non-dividend-paying stock

Dividends are never guaranteed. Companies can suspend or reduce dividends if they begin to experience financial woes — which can put those who are dependent on that income in a financial bind.

Non-dividend-paying stocks typically reinvest their earnings back into the business to fuel growth. These funds can be used by the business for expansion, new products, reducing debt, or other needs. This reinvestment can result in higher capital appreciation and an outperforming stock price.

When you receive dividends from a company, you must pay taxes on that received dividend, whereas non-dividend-paying stocks can be more tax-efficient since they don’t generate taxable income until they’re sold. This can be advantageous for investors in higher tax brackets. In addition, non-dividend-paying stocks can be sold without undercutting the dividend payments that are relied on for income.

We’ll help you sort it out

As always, the advantages of owning dividend-paying or non-dividend-paying stocks can vary depending on individual investment goals, risk tolerance, and market conditions. When you’re trying to determine which kinds of stocks are best for you, you always have a friendly face at UBT to help. Feel free to reach out to our investment team with your questions.