Advantages of Dividend Stocks
Dividend stocks have a strong lure among investors, and the great income opportunity and returns they provide are the chief factors.
In online stock trading, you need to select the right kind of stocks suiting your portfolio. Some stocks have the power to beat the market. These are high yielding dividend stocks.
Dividend Stocks Have Been Consistently Outperforming
As we’ve seen through the years, dividend stocks have managed to significantly outperform the non-dividend paying ones. These stocks have managed to pay cash to their owners without as much volatility as you’d find in the S&P 500 index. The routine cash payments, called dividends, are what make dividend stocks attractive. And as per various studies, you can beat the market by investing only in dividend stocks while avoiding all the others. Jordan Wathen of Motley Fool points out that investing in dividend stocks only could give you a return that’s better than average, and even beat the whole market and many mutual funds that are managed professionally. All through the past decades, we’ve seen dividend stocks totally annihilating the stocks that don’t pay dividends.
The attractiveness of dividend stocks can be attributed to the historic stability of a stock’s dividends over stock prices. Dividends have displayed more stability than stock prices. Wathen quotes a few examples.
A History Lesson
Back in 2008, the S&P 500 lost 37% of the value it had. The financial crisis also lowered the corporate earnings expectations. While the stock prices plunged, there was actually an increase in dividends paid by S&P 500 companies in the period between 2007 and 2008. It was only by 2009 that the S&P 500 companies reduced their dividends as a result of the recession. But even then, the decline was only by around 20%. By 2010, the dividends by S&P 500 companies began rising again. 2011 was when they hit a new high. Stock prices, though, reached a new high only a year later.
The following chart provides a clear picture of the growth in the dividends provided by the S&P 500 companies over the years.
According to this chart, dividends by S&P 500 companies have been stable all through the past 58 years as they grew at a 5.8% compounded annual rate. Wathen states that if an investor had retired in 1960, they could have lived on their dividends and had quite a prosperous retirement as a result of their dividend checks gradually increasing more than the inflation rate. Examining from 2000, there has been a 46% rise in consumer prices as a result of the inflation. But dividends by S&P 500 companies rose by nearly 206% during the same period!
There are more reasons for investors to select dividend stocks.
- Dividends are indications that companies have business models that are pretty durable. Otherwise, they wouldn’t be able to offer a regular dividend every quarter. These businesses can also boast greater earnings quality since they have a great deal more of net income coming as cash.
- Dividend stocks provide the advantage of giving investors the capital gains potential along with the assurance of regular income. Dividend investors also don’t need to choose the time for selling their stocks for funding their post-retirement expenditure since they already generate significant income from the dividend payments they receive.
- Dividend-paying stocks are usually less volatile than the others. They generate higher returns but they also don’t swing around like a yo-yo.
- Income from dividends also gets favorable tax treatment.
All this would have motivated you to head for some dividend stocks. If great returns and income are what you want, it’s hard to beat dividend generating stocks. Trade all great paying dividend stocks commission free with TradeZero.
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