Dividend-Paying Stocks: Where Mitigating One Risk Begets Another

Investing in dividend-paying stocks has long served as a strategy to mitigate equity-market risks. The quarterly payouts can be an indicator of corporate performance and cushion stock-price declines.

“A successful business that issues dividends is showing signs of reduced risk,” says Daniel Peris, senior portfolio manager at Federated Hermes.

Though dividends are voluntary and vary, they are generally paid through thick and thin. Eliot Bishop, a Schwab Asset Management portfolio strategist in San Francisco, was relieved to find that during 2020, the first year of the COVID-19 pandemic, fewer than 10 of the 100 companies in the $64 billion Schwab U.S. Dividend Equity Exchange-Traded Fund (SCHD) had reduced or stopped paying their dividends to pay back the federal stimulus loans they had taken.

However, new risks are on the horizon for dividend investors. The ability or willingness of companies to pay dividends could become less predictable. In what Peris, author of the recently published The Ownership Dividend, terms “a coming paradigm shift,” companies that have no track record for paying dividends may start doing so.

This could...