Why You Should Consider Dividend Investing
When many people start out investing, they look for fast-rising stocks in hopes of “hitting it big.” However, history has shown that investing long-term in dividend-paying stocks is one of the surest paths to wealth. If you have not considered dividend investing before, now is the time to take a look at why you should add dividend-paying stocks to your portfolio.
What is a dividend-paying stock?
A dividend-paying stock is a stock that pays part of its income back to its shareholders in the form of a monthly or quarterly dividend. These dividends pay out a percentage of the price of their stocks. That percentage can be as low as under 1% to as high as 8%. Some examples of dividend-paying stocks include Coca-Cola (KO), AT&T (T), and Apple (AAPL).
1). Dividend stocks are less volatile
There are times when the stock market can get really volatile. A fast-rising stock like Tesla can also have dramatic downturns that can make almost any investor’s stomach churn. However, dividend-paying stocks tend to be less volatile because they have a steady stream of incoming coming in which makes them really valuable to major investors. In short, big investors are much less like to dump their dividend-paying stocks when the market has a hiccup.
2). You can receive a steady stream of income
If you are nearing retirement, then you will want your stocks to begin to pay you back. With a dividend-paying stock, you will be able to receive that payment either each month or each quarter. This allows you to draw an income from your stocks without having to sell them. In fact, many people structure their portfolios with dividend-paying stocks that pay out during different months. This allows certain types of dividend-paying portfolios to pay their owners each month.
3). Dividends can increase over time
When people think about investing, they think about the price of a stock going up over time. However, many successful companies will increase their dividend over time. This can allow you to get a potentially huge yield on cost (YOC). For instance, let’s say you purchase a stock for $50 that paid a 2% dividend. Well that stock will pay you $1 per share in the first year. Now let’s say that the company increases its dividend by 6% per year (which is about average). By year 10, your YOC will be $1.79 or 3.58%.
4). The power reinvesting of your dividends can compound your returns
One of the biggest reasons to own dividend-paying stocks over a long period of time is the power of reinvesting your dividends. Admidditly, dividend-paying stocks are not exciting at first. However, if you reinvest your dividend through a Dividend Reinvestment Program or (DRIP), you can see some incredible returns. For instance, let’s say you purchased $10,000 in Coca-Cola stock on January 1, 1995. If you had reinvested your dividend, you would have $130,756.92 versus $96,624.20 if you did not reinvest the dividends.
5). 75% of the S&P 500 returns from 1980 to 2019 came from dividends
It may shock you to know that the vast majority of S&P 500 returns come from dividends. In fact, from 1980 to 2019, 75% of the S&P 500 returns have come from dividends. Therefore, if you plan on holding a stock for more than a decade, then you should make sure that it pays a dividend.
Getting started with dividend investing
If you want to find the best dividend-paying stocks, be sure to check out the list of Dividend Aristocrat stocks. These are dividend-paying stocks that have increased their dividend payment each year for the last 25 years. Some examples of dividend aristocrat stocks include Realty Income (O), IBM (IBM), Stanley, Black & Decker (SWK), and Walgreen Boots Alliance (WBA).
REFERENCE:
https://www.suredividend.com/dividend-aristocrats-list/
https://gfmasset.com/2019/07/75-of-sp-500-returns-come-from-dividends-1980-2019/
https://www.investopedia.com/terms/d/dividend.asp
