Dividend stocks aren’t as uninspiring as you might think

When it comes to dividend stocks, investors often think of them as boring value stocks. And non-dividend stocks are often seen as the sexy opportunity for growth.

But it doesn’t always work that way. Plenty of growth stalwarts pay dividends, including Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT).

And even if it was just value stocks paying dividends, they have outperformed growth stocks long-term. From 1927 to 2022, value stocks on average outperformed growth by 4.4 percentage points a year, according to Dimensional Fund Advisors.

The most telling statistic may be this: from 1973 to 2023, dividend stocks posted an annualized return of 9.18%, more than double the 3.95% return for non-dividend stocks, according to a study from Ned Davis and Hartford Funds. That’s a pretty strong argument in favor of dividend stocks.

In addition, reinvested dividends accounted for 85% of the S&P 500 index’ return from 1960 to 2024, according to Hartford and Morningstar.

Growing dividends beat high dividends

If you’re going to buy dividend stocks, you obviously want strong companies. So you may want to consider companies that increase their payouts each year. These companies generally have solid finances, which is what allows them to raise their dividend.

At the same time, you may want to avoid companies with the highest dividend yields. Those high yields are often the result of a dropping share price, which could reflect financial problems for the company.

Another important metric for dividend stocks is the payout ratio – the dividend distribution per share divided by profit per share. A payout ratio of more than 75% can be a red flag, because it might be unsustainable if earnings fall.

Dividend stocks often provide risk protection for investors, because the dividends mean companies aren’t frittering their cash away on frivolous spending. So dividend stocks can offer investors both safety and an opportunity for strong returns.