Investing 101: Four Reasons Dividends Still Matter

With the S&P 500 having another good year, up 10.3% as we near year’s end, investors have been able to rack up substantial gains. At times it’s as though every stock has gone up.
Such is life in a bull market.
Despite the raging bull market, where it seems easy money is made on high-flying growth stocks, there’s a valuable group of stocks that investors shouldn’t neglect.
Dividend stocks.
Some investors might say, “Why even bother with dividends when you can make so much more money in other stocks?” It can look that way, particularly in a long bull market. Yet dividends still matter.

Half the Gains

For most of the last 100 years, dividends have accounted for roughly half the gains in the stock market. The 4.5% average annual gain in dividend stocks is roughly equal to the appreciation in non-dividend payers.
Though the performance in dividend stocks has been less stellar in recent decades, it’s still important. Since we’ve been in such a strong bull market the last several years, it may not seem like dividends have added much to your returns. But over time, they add up.
The current yield of the S&P 500 is 1.9%. Doesn’t seem like much, does it? But this average includes many stocks that pay low dividends or no dividends. There are many dividend stocks that pay much more than the average.

The Power of Dividends

The way I see it, the advantage of investing in dividend stocks is four-fold. Those advantages are:
1. Cash in hand: One of the universal truths about dividend payments is that they are real cash. In their classic book on dividend investing, “Dividends Don’t Lie,” Geraldine Weiss and Janet Lowe maintain that while earnings and other measures can be subject to various accounting interpretations, dividends are real.
It’s money you actually get – usually once per quarter.
2. Long-term strategy: The best and most reliable dividend stocks typically don’t make you a whole lot of money overnight. But over time, dividends can deliver substantial gains. A small amount of cash at first can build up into an impressive pile over the years. You might start small and add to your dividend investments over the years.
This can be a powerful retirement strategy – as long as you remain patient.
3. Income, stability, value: With a large enough portfolio, dividends can even provide enough income for living expenses. Some stocks that provide stable, reliable dividends are often traditional names, such as AT&T (NYSE: T), which yields 5.4%, General Electric (NYSE: GE), with a 3.4% yield, or Procter & Gamble (NYSE: PG), at 2.8%.
As Weiss and Lowe stress in their book, dividends can be an underlying measure of value. The companies that are most stable and secure have provided the most consistent payouts through the years, enabling investors to have some margin of safety and security.
4. Growth: Dividend growth is one of the most important factors in dividend paying stocks. Some would say it’s the most important.
When dividends are increased, investors who’ve bought a dividend-paying stock receive even more money than they previously did. Another powerful way for investors to grow their money is to reinvest their dividends into more shares of the same stock by enrolling in a DRIP – Dividend Reinvestment Plan.
It’s a classic, powerful way to achieve compounding interest and gains.
Stocks are thriving at the moment, and it’s tempting to capitalize on that momentum by simply going for growth stocks that have the potential deliver huge short-term returns. But the good times won’t last forever. They never do.
When the market turns sour, you’ll want to have some safety and reliability in your portfolio – not to mention a steady stream of income. Every investor should make dividends an important part of their investment strategy.

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