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Dividend Investing – 6 Important Advantages
I’m a big believer in dividend investing. Dividends are real; they can’t be faked or created with fraudulent accounting. Dividends and dividend growth rates provide an important indicator of the health and value of a company. Finding healthy dividend companies whose stock is bargain priced can provide above average rates of return on your investment.
What is Dividend Investing?
Dividend investing is the process of creating a diversified portfolio of stocks whose underlying companies have the ability to pay their dividend for long periods of time.
Dividends are an important indicator of the value of a stock. A company that is able to consistently raise its dividend probably means they are consistently growing their earnings too. Dividend growth helps to identify well managed companies that have confidence in their future earnings.
Companies that raise their dividend year after year are usually the best companies ( but not necessarily the best stocks). That is why the Dividend Value Builder offers Dividend Stock Lists to find great companies for further research.
Companies with stable business models, quality balance sheets, rising cash flow, and reasonable valuations are the best candidates for dividend investing portfolios.
Here are 6 important advantages of dividend investing:
6 Advantages of Dividend Investing
1. Get Paid to Wait
Dividends allow an investor to get “paid to wait”. Historically dividends have provided 43% of the S&P 500 total return. Dividends provide an ongoing return while waiting for capital appreciation.
2. Dividend Growth Compounding
The benefits of exponential growth are multiplied by growing dividends. This is because both the number of shares (from reinvestment) and the dividends per share are growing. The exponential power of dividend growth compounding can provide competitive returns regardless of whether the price of the stock increases in value or not.
3. Take Advantage of Corrections and Bear Markets
Investors savvy enough to reinvest dividends during corrections and bear markets purchase more shares with the dividend while the prices are lower. Later, when prices recover, the return is actually enhanced by the temporary fall in the stock price. Reinvesting dividends and accumulating more shares during corrections and bear markets greatly boosts dividend growth investing returns in the long run.
4. Capital Preservation
Quality dividend paying companies are more mature and stable than the average company. These stocks usually hold up better in down markets than more speculative stocks. This is especially true when a value approach with margin of safety is used when selecting stocks.
Regular readers of this blog know that I put the utmost premium on the concept of portfolio risk management. Remember, the biggest risk of investing is permanent loss of principal.
5. Create an Income Stream
Dividends provide a regular income stream. Most stocks pay a quarterly dividend, but a well constructed portfolio of dividend stocks can provide a consistent monthly income stream. You want to buy companies that have the ability to sustain (and hopefully grow) their dividend It’s a huge mistake to focus only on yield.
6. Inflation Hedge
The big disadvantage of fixed income investments is that the income stream doesn’t grow. Even a 3% inflation rate will destroy 50% of the buying power of your principal in just 24 years. Dividend stocks provide the ability to receive income that increases and maintains the purchasing power of your principal and income.
Dividend Investing Strategy
The advantages of a dividend investing strategy make it an important part of portfolio management. Getting paid to wait, dividend growth compounding, taking advantage of bear markets, capital preservation, a regular income stream, and the ability to maintain purchasing power are all advantages of dividend growth investing strategies.
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