Outside of the investing world the phrase “it pays dividends” means that an action on your behalf will receive consistent and future benefits. Installing an energy-efficient air conditioning system pays dividends! Buying that bread maker will pay dividends! Or maybe not. Anyhow, physician investors looking to structure their stock investments based on the output of dividends should weigh the pros and cons.
Trade Brains defines a dividend as a distribution of a portion of a company’s earnings to its qualified shareholders. In other words, if you buy stock in a company and they pay dividends, you will receive that payment per the amount of stock you own, thereby sharing in the company’s profits.
Companies that pay dividends to their shareholders are popular with investors and some even tailor their stock-purchasing strategy to heavily favor dividend-paying stocks. A stock’s price may fluctuate up or down, but if they provide a dividend, that is real money paid to the investors. Therefore, investors seeking a steady stream of income will gravitate toward stocks with a steady history of providing and even increasing dividend payouts over time.
Why would a company pay dividends? Isn’t the value of their stock price enough to attract investors? According to PocketSense, publicly traded companies choose to offer dividends because it increases shareholder loyalty and makes their stock more attractive to new investors. An investor with a well-rounded perspective will realize that although a dividend payout can put money in their pocket, every time a company pays out a dividend, they are handing out funds that can otherwise be used to reinvest in their company for innovation, talent, or expansion; this might hurt their value in the long run. For this reason, there is often a correlation between stocks with a slow growth trajectory and stocks that pay steady dividends.
As a physician investor striving for a balanced portfolio, it is important to consider the repercussions of sticking with dividend-paying stocks exclusively. You may receive steady payouts, but the overall value of your portfolio may not grow at a strong rate. Be sure to take this into consideration when putting together your investment strategy and discuss your options with your financial advisor. Remember, in all things balance is key.