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. Recent market volatility however, 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 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. The facts however, present a completely different picture – dividend stocks actually outperform non-dividend stocks by a significant margin over the long term.
The graph below (from RBC Capital Markets) clearly illustrates that over a 20 year time horizon, dividend growth stocks and dividend payers generated an average total return of 12.2% and 10.5% per year compared to 6.9% for the overall TSX index and only 1.6% for non-dividend paying stocks. Additional research we have studied provides the same conclusion – that dividend stock should form the core of any investor’s portfolio.
Dividend Stocks Can Pay Investor’s for Being Patient – You Get Paid as You Wait
Patience is a virtue when it comes to investing, but dividends give investors a reason to be patient, even when the market is not performing. You can wait years for a good company to complete their growth plans, become accepted by the market, or to rise out of a downturn. If they are not issuing a dividend however, you may not be making a return. But if you are being paid a dividend, you are being paid to be patient. If the company struggles with any kind of market head winds, you are continuing to earn a real return on your investment.
Dividends Can Help to Provide Price Support for the Stock during Bear’ Markets
A regular and safe dividend can also provide price support for a company’s stock. During a market downturn, a good company can be punished even if the financials remain intact. If the market is bearish, investors can lose short-term reasons to own non-dividend stocks. In such circumstances, the stock price will typically fall. Why own a stock in the short term if the market is against you? But a company with a stable or growing dividend presents a very compelling reason for ownership – even in a bear market – the more compelling the reason, the more stable the company’s stock price.
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 in turn 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 be 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.
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