4 Reasons Why Every Investor Needs Dividend Stocks in Their Portfolio

Posted by Ryan Irvine - KeyStone Financial

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With interest rates near historic lows, investors have been desperately seeking yield. As a result, one of the hottest segments for investors over the last five years has been buying large companies that pay attractive dividends.

Many question whether or not this can continue. That fact is however, investing in high quality-cash producing dividend stocks is no “Johnny-come-lately” strategy. It is simple, tried & true, and has been used by some of the world’s most successful investors for over a century.

In fact, it is so simple that with the right advice, almost any investor can use it. It is likely why a financial industry that makes its’ money off creating, packaging and selling you exotic daily stock, options, commodities, and forex systems, often casts it aside. They don’t want average investors to discover the simple yet powerful wealth-builders dividend stocks can be.

Some of the world’s greatest investors including Warren Buffett will tell you to stop “trading” and start “investing.”

You need to stop playing the Wall Street game and start using the stock market, as it has been used in the past, as a distribution mechanism for the excess profits of corporations – dividends.

Here are 4 reasons why you should continue to look to high quality dividend paying stocks for superior long-term returns.

1.Dividend Stocks Have Outperformed Non-Dividend Stocks over the Long Term

A very common misconception with the investing public is that dividend stocks provide a lower, albeit safer, return on investment. This has helped dividend stocks earn an ill-conceived reputation for being boring. However, the facts present a completely different picture – dividend stocks actually outperform non-dividend stocks by a significant margin over the long term.

The chart below (from RBC Capital Markets Quantitative Research) clearly illustrates that over a 27 year time horizon, dividend stocks on the TSX Composite Index vastly outperformed their non-dividend paying counterparts. The average annual compound returns of dividend payers was 10.3% compared to 0% for companies that did not pay dividends. 

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2. Dividend Stocks Can Pay Investor’s for Being Patient – You Get Paid As You Wait

Patience is a virtue when it comes to investing, but dividends give investors a reason to be patient, even when the market is not performing. You can wait years for a good company to complete their growth plans, become accepted by the market, or to rise out of a downturn. If they are not issuing a dividend however, you may not be making a return. But if you are being paid a dividend, you are being paid to be patient. If the company struggles with any kind of market head winds, you are continuing to earn a real return on your investment.

3. Dividend Stocks Can Provide Investors with Growth as Well as Regular Cash Flow

Another common misconception about dividend stocks is that they are pure yield investments – meaning that while they provide a dividend, they also provide little or no potential for stock price appreciation. Once again, this notion is false. There are select opportunities in the market that not only pay a generous dividend, but also retain cash for re-investment into the operating business. This allows the company to grow their earnings and increase the distribution on a regular basis – these are referred to as dividend growth stocks. Not only are you receiving a higher dividend (and yield) after every increase, but you will also likely see the value of your stock price increase as well.

4. Dividends Can Help to Provide Price Support for a Stock during “Bear” Markets

A regular and safe dividend can also provide price support for a company’s stock. During a market downturn, a good company can be punished even if the financials remain intact. If the market is bearish, investors can lose short-term reasons to own non-dividend stocks. In such circumstances, the stock price will typically fall. Why own a stock in the short term if the market is against you? But a company with a stable or growing dividend presents a very compelling reason for ownership – even in a bear market – the more compelling the reason, the more stable the company’s stock price.

Again, dividends can be powerful wealth-builders and they offer the extra benefit of providing income even during market or stock pullbacks.

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