The Pros and Cons of Dividend Stocks

The obvious reason for owning dividend stocks is that they pay shareholders real money in real time. You don't have to wait for some promised new product to prove itself in the marketplace, and then presumably drive a stock price higher. Dividend stocks pay you every three months, rain or shine. An electric ultility like Southern Company sparks out a 4.7 percent dividend every year. A telephone company like AT&T rings up 5.2 percent. An oil company like Conoco gushes 4 percent, and even old-line drug companies like Lilly and Bristol Myers squirt out a 3.5 percent yield. That's a lot better than a bank CD which pays less than 1 percent.

Companies that pay generous dividends are concentrated in utilities and old-line industrial businesses. These stocks do not provide adequate diversification for investors. The majority of faster growing small-cap stocks do not pay any dividends at all, and many high-tech stocks don't pay dividends either. By focusing on dividend stocks you may miss out on the sometimes huge gains that can be provided by the next new thing from Silicon Valley, a miracle cure from a biotechnology company or a new trend from a hot retailer.

Source: U.S. News and World Report

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