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5 reasons to Buy Dividend Paying Stocks

Updated on April 30, 2015

Why Invest in Dividend Paying Stocks?

Do you keep hearing on the news about dividend stocks and how you should be investing in them but no one is able to give you a simple explanation of why. The truth is that many of the "experts" aren't even able to give you an answer to this question that is simple, minus all the jargon. This site has 5 easy to understand reasons why you should invest in dividend paying stocks, that even beginning investors will find useful. Read on for basic information about dividend stock investing and some tips and tricks from an experienced investor who invests almost solely in Dividend Paying stocks, with an eye to keeping them for the long-term.

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My Experience with Dividend Stock Investing

A few years ago, I reached a place where I had saved up about $20 000 that I was interested in investing in the stock market. I did extensive research for about a year, looking at the various options. Eventually, I settled on dividend stock investing because it seemed not so complicated, not so risky and could offer good returns if done for the long term. I started investing about 2 years ago, and have a steady stream of dividends coming in every month, about $200 or so. I keep investing more money that I make from my job, as well as the dividends. I hope to grow this monthly income to over $1000/month.

You're a newbie and want to know the basics? Well, dividends are simply earnings that a company pays out to its shareholders. Most companies pay 4 times/year, at a set amount/share. The only fees for this investing strategy are the commission that you pay to buy the stock (from $3-$20) and the same fee when you sell the stock. If you sign up with an online discount broker such as Sogotrade or Interactive Brokers, your fees will be minimal.

As with any investing, do your research first and act second. This site is a good place to start!

Reason #1: Dividends can provide Passive Income

If you want to increase your income, the easiest way to do this is to make some passive income. You can only work so many hours in a day so to make more money by working more hours is not always possible. This is where passive income comes in. Once you do a little bit of work to get things set up, you can just watch the money rolling in. The work you need to do for dividends is to research stocks, set up a brokerage account and buy your stocks. Then, if you plan to hold forever, you can check on your stocks a couple times a year and make sure that the dividend hasn't been decreased and that your company is still increasing their earnings.

5 Dividend Payers to Beat Inflation

Reason #2: Stability: dividend payers are often blue chip stocks

Companies that pay increasing dividends, year after year are generally mature, stable companies. While they may not have the highest growth rates, the chances that they'll go bankrupt are much smaller than the high-growth hi-fliers. The stability of the dividend payers can be great for those looking to not take a lot of risk in their portfolio or for those nearing or in retirement.

Some of my favorite blue-chip companies that have been paying dividends for years (and increasing their payments as well) are: Mcdonalds, Wal-Mart, Exxon Mobil, Chevron and Pfizer. Apple is one of the new Dividend Payers, and their future looks bright.

Reason #3: Dividend Stocks offer guaranteed returns

These days, not much is guaranteed, but dividend paying stocks offer some of the safest, stable returns that you can find. If you select good companies, with a long-term history of raising dividends, you should be happy with your investment for the next 10, 20, or even 50 years. And with bond rates so low, many dividend paying stocks can offer better returns, with not much more risk.

And actually, more than 90% of the total returns on the S&P 500 come from dividends.

Time to buy dividend stocks

Reason #4: You can reduce trading costs by investing in dividend stocks

If most of the return in the stock market comes from dividends, it makes more sense to just buy and hold dividend paying stocks for the long-term, instead of trading frequently. This is a good strategy mostly because it can reduce your trading costs. When you have to pay $5 or $10 for every time you buy or sell, it can be difficult to overcome if you're trading too frequently.

What about Investing in Gold and Silver?

Reason #5: It's Easy to invest in dividend stocks

To find dividend paying stocks, all you have to do is search on the dividend aristocrats or achievers list for those companies that have been increasing dividends for at least 10 years. Then, look at the payout ratio and find the companies with the lowest number. I only invest in companies with less than 60%. This means that the company is not paying out too much of their earnings in dividends but investing some back into their company or saving it for a rainy day. Then, look for the companies with a P/E ratio of less than 15. These stocks are "cheap." Then, just buy and hold for the long term, until the company falls out of favor, or reduces their dividend.

I'm Scared of the Stock Market!

What dividend paying stocks should I buy?

I like the big, blue-chip companies such as:

Coca-Cola (KO), McDonalds (MCD), Kimberly Clark (KMB) and WalMart (WMT).

Some other good choices are the big oil companies:

Chevron (CVX), Exxon Mobil (XOM), and Conoco Phillips (COP).

Some good choices in banking are the big Canadian Banks:

CIBC, Bank of Montreal, TD, Royal Bank, and Bank of Nova Scotia. Internationally, I like Banco Santander.

Do you Invest in Dividend Paying Stocks?

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What do you think about dividend paying stocks?

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    • hopkism profile image

      hopkism 

      5 years ago

      I like this lens and find it to be a great resource, especially the corresponding book recommendations. However, I would suggest you change the wording of "guaranteed" for dividend returns. Dividends are usually stable and usually rise over time. None though are guaranteed. There will be a number of company's that cannot afford to pay their dividend and will retract it. The automobile sector is a great example in recent years. Similarly, dividend yields that are too high suggest that the company is not using that money for the company but instead trying to pay out top shareholders before the company nose dives. This may sound silly or unlikely but it can and will happen. Just look up dividend traps.

    • profile image

      mstcourtjester 

      5 years ago

      Fun and informative lens, keep up the good work.

    • aesta1 profile image

      Mary Norton 

      7 years ago from Ontario, Canada

      Blue chips are great because even when the market goes down much, these are the first ones that will go up.

    • profile image

      anonymous 

      7 years ago

      I am not very good at making these decisions on stocks but will try.

    • polly72 lm profile image

      polly72 lm 

      7 years ago

      Good advice thanks!

    • ajgodinho profile image

      Anthony Godinho 

      7 years ago from Ontario, Canada

      I think it's a great idea to invest in dividend-paying stocks. When you decide to use the buy-and-hold strategy make sure to keep track of trend-line breaches so the stock doesn't end up at square one during a sharp downturn. Seasonâs greetings and the best for the New Year! **Blessed by a Squid-Angel**

    • ClinicallySigni profile image

      ClinicallySigni 

      7 years ago

      I've been looking into a safer way to start investing with stocks and this may just be something to look into. Great lens!

    • sponias lm profile image

      sponias lm 

      7 years ago

      Interesting information! I have to study this matter. Thank you!

    • profile image

      Andy-Po 

      7 years ago

      Very good advice

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