Investing in stocks that pay dividends—there’s nothing new about that advice. Research studies have found again and again that dividend-paying stocks outperform the non-dividend payers, with less volatility to boot.
| Dividend growth investing involves researching and selecting high-quality companies capable of growing profits for extended periods of time, paying shareholders sustainable dividends increased regularly. |
There are various ways to access those dividend-generating companies—individual stocks, mutual funds, exchange-traded funds, and separately managed accounts. In any of those forms, time and time again, dividend-paying stocks tend to represent ownership in larger, more stable, and more profitable companies.
What’s the “big deal” about a dividend investing strategy (selecting dividend-paying stocks)? Actually, there are four or five “big deals”:
- Dividend payouts send a message of stability to investors, a positive clue to the company’s financial state (less healthy companies are not in a position to distribute dividends).
- There’s a tax advantage, too. Qualified dividends are taxed at a lower rate than ordinary income tax rates.
- Retired investors rely on dividends for regular income.
- Perhaps most compelling is the fact that, over the past 93 years, dividends stocks have provided a total return close to double that of stocks without dividends (Investopedia.com).
- Companies that pay out steady dividends have a strong incentive to protect that payout and are less likely to engage in risky debt strategies or make expensive acquisitions.
Is it a good idea for shareholders to reinvest those dividends rather than taking them in cash? Obviously, that depends. Investors who do not rely on dividend income for support can do well with automated reinvestment of the dividends. When it comes to reinvesting the dividends, again, there are a couple of “big deals” here:
- Typical dividend reinvestments trigger no transaction fees.
- The reinvestment can be automatic, requiring no new decision every quarter or half-year.
- Dividend reinvestment is a perfect vehicle for “dollar-cost averaging,” inevitably resulting in the purchase of more shares when prices are low, fewer when prices are high (the precise opposite of nonproductive greed/fear-driven decision-making).
- The compounding effect of reinvested dividends helps build long-term wealth.
Might a dividend investment strategy be a good idea during ”panic episodes” such as the current market upheaval? “Reasonably valued dividend-paying stocks with a long track record of raising the payout are the sweet spot in an uncertain market,” John Dobosz writes in Forbes. One “big deal” tidbit of information that Dobosz reminds us is this: Dividends have contributed to almost half the stock market’s return since 1926!
Nowadays, the average dividend yield for S&P 500 stocks is just shy of 2%, significantly higher than the yield on bank savings. With the recent dramatic drop in stock values, dividend payouts take on even greater importance as Fred’s recent lowering of interest rates puts the positive contrast between stock and bond yields in an even greater focus. Will adverse conditions cause companies to cut their dividend payouts? That possibility certainly exists.
Yet it’s reassuring to note that, when plotting the S&P 500’s dividend growth, adjusted for inflation, www.simplysafedividends.com indicates dividends have been much less volatile than stock prices themselves. There’s nothing new about investing in dividend-paying stocks—and nothing new about the uncertainties investors face looking into the future. But looking to the past, studies have found again and again that dividend-paying stocks outperform the non-dividend payers, with less volatility.
Dividend investment strategies seem to have withstood the test of time.
