Dividend Stocks Have Room to Run

In an effort to eke out as much income as possible from their retirement portfolios, investors are turning their attention to high-yield investment stocks. On one level, it makes total sense—replacing one income-generating investment vehicle with another. At the same time, it’s important to remember that dividend stocks are still stocks—and a lot riskier than fixed-income investments. The current challenge, some contend, is that income-starved investors have elevated dividend stocks to unsustainable levels. Once interest rates begin to rise, investors will pour out of dividend stocks and into the safety of government equities, at which point, dividend-yielding stocks—and their once reliable income—will tumble.

While it is true that dividend-yielding stocks are more popular than ever before, that does not mean they will fall out of favor once the economy rebounds. Companies are sitting on cash. You need cash to pay out dividends, and companies have been hoarding cash. According to some estimates, cash balances with S&P 500 companies are on track to touch $1.5 trillion—a historic high. (Source: Cox, J., “Companies Are Sitting on More Cash Than Ever Before,” CNBC.com, October 23, 2012, last accessed May 2, 2013.) In lean times, a lot of cash is a reflection of good management. Right now, investors see money sitting on the sidelines as a sign of bad management. If businesses aren’t going to put it back into the company, investors want it returned to shareholders.

Source: Business 2 Community

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