Why Invest in Dividend or Income Generating Stocks?
Dividends have a long history of providing returns to intelligent investors. Only in the last 60 years has investing for stock price appreciation surpassed dividends as a key source of return in the eyes of the common investor. However, recent market volatility has caused most players in the market to rethink their investing strategy and in many cases, re-embrace the wealth- building power of dividend investing. For those who are not already aware of the fundamental benefits of dividend investing, we have provided four important arguments below.
Dividend Stocks Have Outperformed Non-Dividend Stocks over the Long Term
A very common misconception with the investing public is that dividend stocks provide a lower, albeit safer, return on investment. This has helped dividend stocks earn an ill-conceived reputation for being boring. However, the facts present a completely different picture – dividend stocks actually outperform non-dividend stocks by a significant margin over the long term.
The graph (from Ned Davis Research) clearly illustrates that over a 30 year time horizon, dividend stocks on the S&P500 generated a total return of 10.19% per year compared to the 4.39% generated from non-dividend stocks (a nearly 6% difference). We can also see from the graph that this margin of superior performance has widened in the more recent years.
Dividend Stocks Can Pay Investor’s for Being Patient – You Get Paid As You Wait
Dividends Can Help to Provide Price Support for a Stock during ‘Bear’ Markets
Dividend Stocks Can Provide Investors with Growth as Well as Regular Cash Flow
Another common misconception about dividend stocks is that they are pure yield investments – meaning that while they provide a dividend, they also provide little or no potential for stock price appreciation. Once again, this notion is false. There are select opportunities in the market that not only pay a generous dividend, but also retain cash for re-investment into the operating business. This allows the company to grow their earnings and increase the distribution on a regular basis – these are referred to as dividend growth stocks. Not only are you receiving a higher dividend (and yield) after every increase, but you will also likely see the value of your stock price increase as well.
In short, dividends should make up a core source of return in any investor’s portfolio. The companies that pay dividends truly come in all shapes and sizes. For those investors that are truly committed to growing their wealth over time while controlling risk, allocating a reasonable percentage of capital to dividend investing is not just prudent, it is fundamentally essential.