IF YOU BUY BONDS that pay a fixed rate of interest, your annual investment income will be stable—but the price of your bonds will fluctuate. With cash investments, it’s the reverse: You should never lose money with a savings account or a money-market fund, but the interest you receive will fluctuate along with short-term interest rates.
What about stocks? At first blush, there doesn’t seem to be any stability. Neither the price of your shares, nor the dividends they pay, can be counted on to stay the same. That said, the dividend income from a diversified collection of stocks should be far more stable than the price of those stocks, a topic I touch on in this week’s column.
For instance, over the past 50 years, the S&P 500 has had 12 years when it posted a price decline—but just five years when dividends decreased. Moreover, those dividend decreases were modest compared to some of the price drops suffered—and the long-run trend is impressive. Over the past 50 years, dividends have climbed 5.7% a year, comfortably ahead of the 4.1% inflation rate. That’s why I’m a fan of dividend-oriented stock funds, especially for retirees and those approaching retirement.