Among the things every investor needs to figure out for themselves is where they sit strategically on the conservative to aggressive continuum. Will you sleep soundly at night even if your portfolio is heavy on volatile growth stocks that could lead to wide swings in your net worth? Or are you currently counting on a steady flow of consistent income from your investments, and in need of assets that can provide that, even if it might mean smaller long-term gains?
In this segment from Motley Fool Answers, host Alison Southwick is joined by senior analyst Jason Moser and Motley Fool Wealth Management's Ross Anderson to answer the question of a listener trying to understand the variations in what is getting paid out at the conservative end of the spectrum between interest-bearing assets and dividend-paying stocks.
A full transcript follows the video.
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Alison Southwick: The next question comes from Josh. "I have a question about dividend yields. I often see them written out as a percentage; for instance, I see on Fool.com that AT&T currently has a dividend yield of 6.2%. Is that equivalent to an interest rate? With banks still paying less than 2%, a 6% interest rate sounds great, but I'm not sure if a dividend yield is essentially the same thing?"
Jason Moser: That's a good question and in short it is essentially the same thing in that you are either going to get paid for having your money in a savings account or with a CD, or you're going to get paid by a company who offers a dividend for hanging onto their stock.
Now typically a company is going to pay a dividend four times a year -- once every quarter -- and that rate or that percentage that you see [with] the yield is based on the amount that they pay out compared to the stock price. That can certainly fluctuate, but generally speaking, particularly in today's interest rate environment, dividends are a far more attractive option. I think they will be that way for some time to come because even though rates will continue to go up, they will go up fairly slowly and generally speaking, these companies that pay dividends are pretty reliable. Their business models produce some pretty reliable cash flows that allow them to keep paying those dividends and often times raising those dividends.
So if you really want to find the awesome dividend companies, you look for the Dividend Aristocrats, and those are the companies that have grown those dividends for long periods of time. I think the qualifier is at 25 years? Is it 30? I have to double-check that, but they have a very long-established track record of growing those dividends on an annual basis.
We'll probably hit a point in time where interest rates become a little bit more attractive and when that happens, you're very likely to see some of those dividend stock prices take a little bit of a hit as money starts to flow toward more risk-free assets. And I think as an investment strategy, on the whole, it's always a good idea to plan on owning some good, staid dividend payers for long periods of time.
Alison Southwick has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Ross Anderson has no position in any of the stocks mentioned. Ross Anderson is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.