With banks still paying so little interest on savings, you could make your money work harder with well-chosen dividend-paying stocks.
If you have a savings account in the bank, you’re likely earning some interest — but not a lot.
The Federal Reserve is widely expected to bump up interest rates in coming days — which should ultimately bump up what you make on your deposits. But as it stands, many traditional banks today offer less than 0.05 percent annual yield on deposits in regular (no minimum) savings accounts, and the highest yields on regular accounts offered by online banks — hover around 1 percent.
Your money is safe in a bank or credit union, but it could do better — on Wall Street.
Of course, stocks are known for their risks but often offer higher rewards for sticking your neck out a little. And some also pay interest on your investment — only the income is referred to as dividends.
So, for example:
- AT&T: Trading at around $42 a share, the telecommunications giant’s stock is paying a dividend of about 4.6 percent.
- Microsoft: Recently priced at $65 a share, the software behemoth is paying 2.4 percent return on your investment.
- Proctor & Gamble: The consumer goods manufacturer’s shares are trading at nearly $91, and paying a dividend of 2.9 percent.
To compute a dividend yield, divide the annual dividend by the current stock price. For example, if stock in Company A cost $50 a share and the company paid an annual dividend of $1, its yield would be 2 percent.
Research any company before you buy its stock
Some investors don’t trust companies that issue dividends. The money should be used to fuel company expansion, their argument goes. However, proponents of dividends prefer the payouts, not just for the steady stream of income but as proof that company managers are running operations properly.
One proponent of dividend-earning stock is billionaire master investor Warren Buffett. At the end of 2016, 34 of the 44 publicly traded stocks held by his company, Berkshire Hathaway, pay a dividend, according to the website Simply Safe Dividends.
Among Berkshire holdings are large stakes in American Express, Coca-Cola, IBM and Wells Fargo. In 2015, these “Big Four” companies paid Berkshire $1.8 billion in dividends alone, Buffett reported in his annual letter to shareholders.
But, as with share prices, dividends can go up or down over time, so you need to choose wisely.
The National Association of Investors, in its BetterInvesting.org blog says to look for stock in a company with a long but moderate dividend history.
Many double-digit yields are not sustainable, the blog warns. “Ask yourself where the money is coming from when you see extremely high payouts.”
Regardless of the size of your bank account and investing experience, however, you should exercise caution. In his 2014 annual letter to shareholders, Buffett offered a warning against an array of risky stock-investing behaviors:
Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy.
Interest rates are set to rise — so it’s reasonable to expect that the interest you earn on your bank savings account will begin to edge up too. But if you have money sitting there that you can afford to set aside in a dividend yielding stock or an exchange traded fund (ETF) that invests in an array of dividend-paying companies, you can probably make that money work harder.
Are your dividend-focused investments paying off? Share your experience in the comments below or on our Facebook page.
Kari Huus contributed to this post.