Market Buzz – Why Invest in Dividend (Income) Stocks?
Dividends have a long history of providing returns to intelligent investors. Only in the last 60 years has investing for stock price appreciation surpassed dividends as a key source of returns in the eyes of the common investor. Recent market volatility however, has caused most players in the market to rethink their investing strategy and in many cases re-embrace the wealth-building power of dividend investing. For those who are not already aware of fundamental benefits of dividend investing, we have provided four important arguments below.
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 graph below (from Ned Davis Research) clearly illustrates that over a 30 year time horizon, dividend stocks on the S&P500 generated a total return of 10.19% per year compared to the 4.39% generated from non-dividend stocks (a nearly 6% difference). We can also see from the graph that this margin of superior performance has widened in the more recent years.
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.
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.
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 in turn 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.
In short, dividends should make up a core source of return in any investor’s portfolio. The companies that pay dividends truly come in all shapes and sizes. For those investors that are truly committed to growing their wealth over time while controlling risk, allocating a reasonable percentage of capital to dividend investing is not just prudent, it is fundamentally essential.
For investors interested in learning more about how KeyStone Financial can help add dividend growth stocks to a portfolio, go to our Income Stock Report website (www.incomestockreport.com) or email us at email@example.com.
Looniversity – Debt Vs. Equity Analysts
In investing circles, there are two broad categories of analysts – debt and equity analysts. Debt analysts are known to take a fine-toothed comb to company financials, poring over balance sheets and profit-loss statements. Since they are paid to warn clients whether a company has adequate cash to make its debt payments, they are often ahead of the pack in predicting trouble.
Equity analysts, on the other hand, are more focused on a company’s growth outlook. What are the catalysts that will help earnings? Does the company boast product-line changes that will translate into revenue increases? Most important, will the market reward those trends by bidding up the stock’s price? While it is oversimplification, equities analysts tend to look at the upside, whereas debt analysts tend to look at the downside.
Now the question becomes – which group should investors heed? Experts say each can provide value, but together, they can give a much fuller picture of a company. However, each can have their biases in regards to the company they are assessing (corporate financing). So read each group’s comments, compare them, and take them with a solid grain of salt.
Put it to Us?
Q. Can a company pay or declare a dividend that exceeds its earnings per share?
– Ian Hunt; Calgary, Alberta
A. Indeed, they can. In fact, many of the world’s most well-known companies have paid dividends in years where they posted negative earnings per share! While this is not a practice that is viable long term, near term, when it comes to declaring and paying dividends, current earnings per share has nothing directly to do with whether a company is able to pay a dividend. Particularly in reference to companies that operate in cyclical industries, we see situations where a company has a string of more profitable (high EPS) years, in which it sets aside cash to pay future dividends, affording it the luxury to maintain its payments in down years or years where EPS is lower than its dividend. In the near term, what matters in reference to paying is that dividends are “retained earnings” and available cash. Having said this, we would pay particular attention to cash flow and free cash flow long term. A company cannot continue to pay out dividends that exceed cash flow over the long haul.
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