Dividend investing isn’t as cool as some of the investing methods highlighted by the movies. You won’t see Jim Cramer shouting “buy, buy, buy” because a stock is a dividend aristocrat, but dividend investing is still one of my favorite styles of investment.
I’ve mentioned in the past that I live differently than most people and I think differently, so my investing style isn’t much different. When you consider that the average time that a stock is held ranges anywhere from 22 seconds to 7.5 months– either figure isn’t that large. Here are some reasons why I like dividend investing.
Dividend Reinvestment
Dividend Reinvestment is made so simple by nearly every brokerage. When dividends are disbursed, your brokerage automatically takes the dividend and purchases additional shares of the stock. This creates a compounding scenario where you earn dividends on your dividends. This is the fundamental driver behind yield on cost.
Dividends Are Predictable
They are declared, and they are paid out quarterly. If you pick up a dividend aristocrat, then you have a very reliable dividend stock that will only cut dividends in the worst of times (or if company philosophy drastically changes). No company likes to break a 25+ year habit of raising dividends each year unless it is absolutely necessary!
Dividends Can Be Generous
I’m painting with a broad brush here, but dividends can be a very generous investment device if managed properly. Currently, my portfolio is averaging 3.5% in dividend returns. Compare that to what most banks are paying on savings or CDs (.5% to 1.5%). I don’t know about you, but I haven’t seen CD rates or Savings rates go up in the last few years- they just keep dropping.
I know it isn’t the most exciting method of investment, and it doesn’t provide the highest returns, but I wanted to give a few reasons why I like dividend investing, and hopefully provide some useful information that you might not have known. What do you think of dividend investing? Let me know in the comments!
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Are you worried of a potential dividend stock bubble? It seems to be very recommended lately which makes me wonder if things get better will people sell these stocks?
There is always that risk. I prefer to look at dividend stocks as more of a long-term thing where I can handle a fairly significant downswing as long as the dividends continue to be paid. Since I don’t have the intention of cashing in the stocks soon I see it as more of a passive income source that can be easily re-invested if you choose. The bubble potential does mean you have to be more selective though and probably stay away from certain sectors.
Hey There Lance,
I’m not concerned with a bubble for a couple of reasons. Currently, P/E ratios (even on the Dividend Aristocrats) aren’t really that high. You’ve got a couple of Aristocrats at P/E 20+, but the majority are between 15 – 20 and some are even less.
To me, a bubble signifies a price that is unjustified by its earnings. To me, Facebook started out in a bubble, LOL. I feel that P/E of 15 – 20 is still relatively reasonable.
The other reason that I’m not concerned with bubbles is because Dividend Investors are looking at a longer timeline. If there were a huge sell off of Dividend stocks, it would only be for the purposes of freeing up capital to purchase higher yielding securities.
That being the case, the fundamentals of that stock haven’t changed, which means the price will recover over time (unless it were an unjustified price, which should be reflected in the P/E). So, a sell-off of these characteristics would actually encourage me to purchase more of the stock, being that the price depression is unrelated to the stock’s fundamentals.
I hope this addresses your questions, thanks for stopping by!
Thanks,
Timothy
P.S. Garrett, great explanation. I think I was a bit more long-winded, but we were getting at the same ideas 🙂