Ask Matt: Should I buy a stock because of its dividend?

ByABC News
July 10, 2012, 7:44 PM

— -- Q: Is it a bad idea to buy a stock simply for its dividend, using Linn Energy as an example?

A: There are plenty of bad reasons to buy a stock, but going for the dividend isn't one of them.

Investors often forget how important dividends are when stocks are rising during bull markets, but historically, dividends account for about 30% of stocks' total returns. Dividends have another benefit in that they tend to rise over time, as companies increase them along with rising profitability.

For investors looking for a steady stream of cash from their portfolio, dividend-paying stocks can be a valuable asset. Dividends offer some stability, in that, no matter what the stock market does, companies are expected to maintain their current level of dividend payout. It's not a guarantee that companies will keep paying their dividends, but cutting a dividend is something most companies work hard to avoid.

There's another benefit of dividends when it comes to stability. Often, the companies with a strong track record of paying rising dividends hail from relatively stable industries. Utilities, consumer packaged goods, certain energy transportation firms and some real estate companies have stable businesses, so they're more apt to pay and increase their dividends.

And there's no question, Linn's dividend certainly is a big draw to its stock. Linn is a publicly traded, independent oil and natural gas exploration and production company. It focuses primarily in key fields, including Mid-Continent, Permian Basin, Hugoton Basin, Powder River Basin and Williston Basin.

But what's of most interest to investors are Linn's dividends. Currently, the stock is yielding 7.44%, which is well above what investors would get from many other income-generating investments.

And as long as Linn keeps paying that dividend, and there's no indication currently that's in question, there's plenty for income investors to love.

But, here's the important caveat with dividends for any company: They are not obligated to continue to make the payments. Dividends can be cut or outright eliminated at any time. Dividend payments are not obligations as bond interest payments are, which makes them much less secure. During the financial crisis of 2008, for instance, many companies did cut or suspend their dividends.

So a dividend is absolutely something long-term investors should pay attention to. But don't make the mistake of assuming the dividend will never be interrupted.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz