- Personal Finance»
- Investing in Stocks, Bonds, Real Estate, More»
5 Reasons You Should Invest in Dividend Stocks
Dividends Belong in Your Portfolio
Dividend stocks are a great addition to any investor’s portfolio, especially yours! These stocks pay you a set amount each quarter, month, or year as long as you hold shares in the company. I believe that dividends are one of the greatest tools you can use to increase your wealth dramatically over time.
I am not alone in this thinking, Warren Buffet’s holdings are largely dividend paying stocks, and he holds some of the most well-known dividend paying stocks in the market, like Coke and Bank of America. John D. Rockefeller was quoted as having said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
Peter Lynch, Kevin O’ Leary, and Mark Cuban all have expressed favor towards dividend stocks as well. The reason is simple; they are an income producing asset that you do not have to sell in order to make a profit. They are the very definition of passive income, simply buy the stock you want to own and the dividend payments will be deposited into your account every time they payout! How great is that?
So here are 5 reasons you should invest in dividend stocks
1. Dividends Provide Steady Income
This is the biggest reason investors love dividends, and of course it’s the first reason on this list. As you buy and hold dividend stocks they will generate steady income for your portfolio. Whether you have quarterly, monthly, or annual payouts your dividends will come in regularly and you will see the cash available in your account after each payment.
Unlike holding non-dividend stocks you do not have to sell the underlying asset, the stock, in order to generate income! You can make a return without the price appreciating, and you can continue to hold the stock.
This is truly how you put your money to work for you, when you buy dividend stocks you are buying an asset that will put money in your pockets for years to come.
2. Dividend Stocks Appreciate
Just like any other stock on the market dividend stock prices will fluctuate. But over the long term dividend stocks tend to go up in price. This is doubly beneficial to you as the investor since you receive the regular income provided by the dividend payment and you get to watch your stock increase in value. This will of course, increase your portfolio’s overall value.
Over time dividend stocks tend to outperform their non-dividend cousins in the market. This is because investors see the returns on dividend payments and continue to invest in these dividend paying stocks and increase the amount of income they receive from the dividend payout. They are using the power of compounding, and this appreciation will help make sure your account is beating inflation and providing you with a larger net worth.
Make Your Wealth Generation Automatic
3. Dividend Reinvestment Puts the Power of Compounding in Your Hands
As you reinvest your dividends, over time you will see the results of compounding. Each time you reinvest you are simply purchasing more shares of stock that pays dividends using the dividend you were paid. This can be the same stock that originally paid you or a different stock that pays dividends. I like that this money is added to my brokerage account without me having to spend my personal balances on it.
This will simultaneously grow your portfolio and your future dividend payments. Over time this additional growth will become a huge source of wealth and income in your portfolio.
Best of all this reinvesting is made easy with automated DRIP plans available from most brokers. I use TD Ameritrade, and turning on reinvestments is as easy as clicking a button. Each time a dividend payment comes in, my broker automatically uses the amount to purchase more shares of the stock that paid it. This makes compounding easy and keeps you from missing out on great returns.
This also cuts down on the time you need to spend watching your account, with DRIP plans you can check in every quarter and make sure the stocks you own are still performing well. Less time spent looking at your portfolio means more time to enjoy the wealth you are creating.
4. Dollar Cost Averaging
Dollar cost averaging is a principle that shows when you are paid dividends your cost per share goes down. For example, let’s say you have 100 shares of XYZ that you bought at $10, and they pay a dividend of $1 per share every quarter.
After your first dividend payment your cost per share, the amount you spent to purchase the stock, is down to $9 a share. This means that over time you could lower the purchase price to $0 if you held the shares long enough.
If you held XYZ for ten quarters, 30 months, your cost per share would be $0. This would allow you to sell the original shares for less than $10 and still have made a profit.
Note that this particular arrangement is unlikely; the numbers I used are simplified in order to show the power of cost averaging. You would most likely lower your original shares cost by about 5-6% a year, since 5-6% is the average annual dividend yield.
Even as you acquire new shares the original shares you purchased are still going to benefit from cost averaging and the new ones will once they are paid a dividend. Imagine having an employee who was so effective that he eventually costs you nothing to employ. This is what cost averaging can do for your dollars. Over time this principle, combined with compounding, can make you very wealthy.
5. Dividend Stocks Are Less Volatile
Historically, we have seen that dividend stocks are less volatile than non-dividend stocks. This is due to the fact that most dividend stocks are more established in their respective sectors, have a longer stock history, and keep investors happy by providing consistent returns in the form of dividends. With a portfolio that leverages the strength of dividends you will experience less fluctuation in stock prices.
This stability will allow you peace of mind as you invest over time, and you will see more growth because of it. Since you will not be constantly worried about the price of the stock dropping you will feel much more comfortable investing and reinvesting your earnings.
I hope I have convinced you to invest in dividend stocks, I truly do believe that by consistently investing in income producing assets, like these stocks, that you can begin the journey to financial independence.
Dividend stocks are not the only income investment available on the market but they are one of the most reliable and the most available, in terms of affordability and availability, you can’t beat dividend stocks.
If you aren’t the investing type you can buy mutual funds that are set up to take advantage of the returns generated from dividend stocks. Funds like the Vanguard Dividend Growth Fund Investor Shares (VDIGX) can help you simplify the investment process, and Vanguard is more affordable than most funds.
Before you get started remember that this is not a get rich quick strategy, and that real wealth building takes time and money to invest. If you don’t feel like you have enough money to invest check out my article 4 Steps to Destroy Your Debt in order to free up massive amounts of your own income that you can use to invest.
Let me know in the comments what questions you have about dividend investing? I'll answer any question you have, thanks for reading and please share!