Dividend stocks – that term says a lot. You buy a stock and on a recurring basis it pays you a cash dividend. And over time, thanks to those cash distributions and capital appreciation fueled by shareholder loyalty, the stock price rises. That’s a great way to build wealth.
You see, back in the good old days, in the early 20th century for example, dividend stocks were a big focus for investors…and were expected. Dividends were a primary reason why people bought stocks at all – for the income. It was a big deal to be a shareholder…companies valued them.
Now, there has always been periods of big-time stock market gains. Which does, of course, distract some investors from focusing on dividends. Their expectations shift from long term wealth building to short term lottery winnings. But at the end of the day (or year, or decade), when those histrionic returns recede, logic prevails and stock investors’ attention comes back to dividends.
Dividend Stocks: Past and Future
You see, times change, and investors’ priorities vary, but history keeps proving that investing in stocks that pay dividends is one of the best, if not the best, way to build wealth. The reason is fairly simple. If you buy a stock for growth, you may or may not get it. You are speculating, hoping that your analysis is correct, that the stock you’ve invested in will increase in value. But it might not.
However, if you buy a stock that has paid a consistent and growing dividend, well, you can fairly well calculate your growth rate. Consider the Standard & Poor’s 500 stock index. Study after study has proven that the returns of the index without dividends amounts to a fraction of what they are with reinvested dividends factored in. Which means one thing.
If you are investing in stocks on an individual basis, not in a mutual fund or an ETF, and you are not considering whether or not the stock is paying a dividend, you may just be gambling and may ultimately end up unsatisfied with your results. That’s because dividends are a measure of a company’s success, a company’s maturity and a company’s commitment to its shareholders.
The purpose of a company is to increase shareholder value. Paying a dividend attracts new investors and keeps loyal investors in place. Stocks that do not pay a dividend are required to deliver better-than-expected earnings results – merely meeting expectations is not enough and may send a stock price tumbling.
Wise investors, and those who wish to count on their wealth increasing, have always and will continue to look to dividend stocks.
Thanks to the recent tumble in the stock market, the average S&P 500 dividend yield is now over 2%.
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