Many investors are attracted to high dividend yield stocks for the income they produce. These types of stocks are often sought out by investors nearing retirement or in retirement because of their need for income. Investors can make money in stocks two ways – by receiving dividends or by seeing the price per share of their stock increase. Consistent and increasing dividend payments can create strong investor loyalty to a stock. A dividend is a share of profits that a company pays out to shareholders often on a quarterly basis. For example, Buckeye Pipeline has had a long history of paying dividends and at an attractive rate, often paying over a 10% dividend rate over the last few years. The problem though is that while you can make money from stock price increases, you can also lose money (potentially your whole investment) when the share price drops. Many large dividend paying companies have seen large share price losses over the last few years, Buckeye included. In 2017, the stock was down -17.53% and then another -32.34% in 2018 even after the dividend payments. Now, those investors will need to figure out another plan for what to do with the proceeds when the acqusition settles (expected to occur over the next few months). So what should you do?
- While dividends are attractive and can appear to be safe, they are not guaranteed payments. Companies are not required to pay dividends and if they are currently paying them, they have the ability to cut or completely stop them at any time. Investors sometimes feel a false sense of security because they feel comfortable with a company given their reputation, they like their products/services, or they have owned them for a long time. We recently experienced how that can backfire with General Electric (GE) who has seen their stock price crumble and dividend payments cut in half. Dividend paying stocks can be great, but make sure you own a diversified mix of them.
- Stocks may or may not be a good investment for you depending on how much income you need. With interest rates rising over the last couple of years, bonds are now paying more respectable rates and you may be able to generate the income you need with substantially less risk by using a mix of stocks and bonds.
- How you own Buckeye (in an IRA, Roth IRA, or a brokerage account) and when you purchased it will determine how you are taxed. Taxation impacts many aspects of your retirement plan (i.e. how your Social Security is taxed, how much you pay for Medicare, what tax rate you pay on income) so it’s important to have an understanding of your specific situation to understand how this impacts you.
We specialize in wealth management for retirees so we would be happy to talk with you about your situation and how you may be impacted by the acquisition. Please feel free to call our office or click here to schedule an appointment.