In volatile markets investors may find comfort in dividends

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As uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection from the bumpy road ahead may find dividend-paying stocks could offer an attractive mix of features and warrant a place in their equity portfolios.
The appeal is simple: Dividend-paying stocks can potentially provide investors with current income regardless of market conditions.

The potential benefits of dividend-paying stocks

If you own stock in a company that has announced it will be issuing a dividend, or if you are proactively considering adding an allocation to dividend-paying stocks, history has provided evidence of the long-term benefits of dividends and their reinvestment.Footnote 1
  • A sign of corporate financial health. Dividend payouts are often seen by some investors as a sign of a company's financial health and management's confidence in future cash flow. Dividends can also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength.
  • A key driver of total return. There are several factors that may contribute to the total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.Footnote 2
  • Potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and from 1990 through 2018, stocks with a history of increasing their dividend each year have also produced higher returns with less risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats — those stocks within the S&P 500 that have increased their dividends each year for the past 25 years — produced average annualized returns of 12.13% vs. 9.96% for the S&P 500 overall, with less volatility (13.22% vs. 14.22%, respectively).Footnote 3
If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind.
  • Dividend-paying stocks may help diversify an income-generating portfolio. Income-oriented investors may want to diversify potential sources of income within their portfolios. Given current realities present in the bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.
  • Dividends benefit from potentially favorable tax treatment. Most taxpayers are subject to a top federal tax rate of only 15% on qualified dividends, although certain high-income taxpayers may pay up to 23.8%. However, this is still lower than the current 37% top rate on ordinary income.Footnote 5
Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.

Footnote 1 Past performance is no guarantee of future results.

Footnote 2 Dollar cost averaging and dividend reinvestment do not ensure a profit or protect against loss in declining markets.

Footnote 3 Return and standard deviation cover the 10-year period from 1991 to December 31, 2020. Volatility is measured by standard deviation. Past performance is no guarantee of future results.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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