Dividend Stocks

Why Should You Invest In Dividend Paying Stocks?

Stock dividend
I believe that creating a passive income stream through dividends is an achievable, intriguing and stimulating way to decrease ones dependency on salary income alone. Stocks on the other hand offer you the best possible investment opportunity out there. Over 30-35% of stocks performance over the past 50 years has been attributed to dividends; the rest comes from capital gains. A closer look at the S&P 500 from 1957- 2005 shows that dividends have grown on average of 5.3% per year for the index. With inflation assumed to be averaging around 3 – 4% per year, the investment in dividend paying stocks would have provided the investor with an income that keeps its purchasing power year over year, which unlike fixed income securities, can also provide them with capital gains.

Even during turbulent market conditions when most investors are fixated on their capital losses, incoming dividend payments would definitely soften their losses. During the 1966-1982 period when stock prices returned 1.45% on average per year due to high commodity prices, stagflation and high-unemployment, the average dividend yield in the S&P 500 was 4.2%.

There are amazing dividend paying companies such as Colgate Palmolive (NY:CL) (yield 2.0%) that have paid dividends every year since 1895 or Proctor & Gamble (NY:PG) (yield 1.9%) since 1891. These tremendous dividend histories confirm the companies’ commitment to paying dividends. Are the dividends sustainable ? (Check the dividend payout ratio). Are the dividends growing ? (Check the dividend growth rate). Even better, when dividend paying companies you own increase their dividend payouts, your income increases! How long has the company paid dividends ? (Check the dividend yield and history).

Dividend stocks give you both growth as well as income. Here are a few strong reasons as to why you should consider it:

1. They give out a good return
2. The dividends are lightly taxed. We are talking only 15% here. Compared to other options, that’s pretty significant.
3. You don’t have to do anything to get your dividend, they just send it to you. I like having to do less work.
4. You have a lot more control over them, the funds aren’t “trapped” like many other investments. This gives you a lot more flexibility over your investment.
5. Dividends can increase over time (unlike bonds). This can increase your earnings significantly.
6. Dividend yields can also increase over time. Again, this can compound your earnings significantly.
   

As you can see, the best dividend stocks have some unique features that other investments tend not to have.


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