The America stock market has been one of the greatest
long-term wealth generators in history. It has a record of compound annual
growth rate of 9% since the late 1990s. Even after Great Depression of 1929 and
other stock recessions and stock collapses, the U.S. stock market has always performed
well for investor in the long run. Many people have different strategies
towards their investment. Some like to speculate stock in short term period
such as day trading, some prefer to let the experts do their job such as fund
managers to manage their money in a form of mutual fund. However, an average
person can learn how to invest safely. Dividend growth investing is a good
strategy if you want invests on your own. Here
are five reasons why you should become a Dividend Growth Investor.
1. Dividend Growth Investing is Remarkably Effective for Retirement.
If you want to have a source of income for your retirement, then Dividend
Growth Investing is suitable for you. Dividend Growth Investing gives the
investor the ability to earn passive income from the dividends payout without
selling the stocks. I like this reason because as a Dividend Growth and Value Investor, I tend to want to keep the stocks that I purchased forever. I can
transfer the dividend income from my brokerage account to my checking account
and use the money for my everyday expenses. In addition, I can always let my
children or grandchildren inherit my dividend growth portfolio, giving them the
ability to earn those passive incomes if I passed away. The feeling of owning a
dividend growth portfolio is like having a Magic Goose that lay golden egg
every day, but in this case is in a form of passive income that you can spend
it, give it to charity, reinvest it or add it on your savings.
2. Dividends
Growth Investing is More Favorable During Stock Market Crash
During the meltdown of the stock market,
strong dividend stocks tend to hold their value compared to the non-dividend
paying stocks. The reason is because of its dividend payment. If you choose the
right dividend growth companies, it will still pay its dividend to your
portfolio. In fact, you want to use this time as an opportunity to purchase the
stock that dip with the dividend received or add additional capital towards
your dividend growth portfolio.
I like the fact that I can still earn my
passive income without worrying whether the stock market is going up or down
since I will be making those passive incomes. For example, let’s say you hold 2
stocks of $100,000 investment, one
is dividend paying stock which Johnson
and Johnson (Ticker: JNJ) which you invest $50,000 (paying 3.0% dividend yield) and the other is not a
dividend paying stock which is Crocs
Inc. (Ticker: CROX) and also invest $50,000.
Let’s say the market went into a collapse and both stocks you own went down 50% in value. Your Johnson and Johnson
stock dividend yield would increase to 6%
at that price (assuming that dividend per share is still the same). This gives
advantage for the dividend paying stock to earn passive income and of course
invest at a more attractive dividend yield, adding more shares either into the
original stock or some other undervalued dividend growth stock. In other words,
as a dividend growth investor, the dividends that you received are tangible and
permanent benefits that no stock crash can undo. However, you are not able to
get cash from your Crocs Inc. stock, and if you need the money, you’ll need to
sell the stock promptly at an unfavorable price losing 5 to 10 years of unrealized profit, you
gained nothing for all the patience and savings over time. My suggestion, you
should not sell stocks during market turmoil but instead purchase more stocks
at the period of time. Investors can many times be hurt by impulses and
emotion, often buying and selling too quickly. It’s much simpler to avoid these
mistakes by purchasing and holding a high quality dividend paying stock that
raises dividend payment consistently year after year. Real money sent directly
to your brokerage account is very attractive, especially when the world is
falling apart from you.
3. Dividend
Growth Stocks vs. Fixed Income
Some might argue if you need passive income why not just buy Bonds or CDs,
and you don’t have to worry about the stock price fluctuating. Well my reason
is that dividend growth stocks tend to increase their dividend payout each
year. Let’s say you bought $1000 of
dividend growth stocks such as Coca Cola Co., the dividend yield might be low
like 3%, which mean you will receive
$30 in dividend income. However, if
the Coca Cola stock increase their dividend by 5% throughout the future. The yield to cost from Coca Cola Co. will
be 12.95% twenty years to the future, which mean you will be earning $129.5 on your $1000 investment. Compare to bonds, if you invest $1000 in bond that yield 4.000 coupons for 20 years. You would only make $40
each year, and in year 20, you will
only still be making $40. Not only
the dividend income will be different, a good dividend growth stock has the
potential to have capital appreciation making the future price be different
from bonds.
4. Dividend
Growth Investing Tend to Outperform the Market in the long term.
Yes, you read it right. Dividend Growth Investing
tends to outperform the market in
the long run. There is studies show that stocks that raise their dividend in
general tend to go up in value. For example in the case of 3M Co. (Ticker: MMM), the dividend yield from 10 years ago was
nearly the same as it is right now. However, the stock price and their dividend
of 3M Co. from 2009 to now
(2019) have tripled. In addition
the chart below shows how Dividend Aristocrats companies have beaten the S&P500 performance by a huge margin. This shows that dividend
growth investing is an ideal strategy for investors who want to invest. Another
interesting fact is that historically 52.3%
of all the returns the S&P500
has ever generated to investors come from dividends. Morningstar has conducted
study showing that dividend income compose of total return of 42% for Large Cap stocks, 36% for Mid Cap stocks, and 31% for Small Cap stocks since 1927 to 2012. This shows that dividends
are an important factor.
5. Management
is More Careful With Dividends Vs. Non-Dividends
When a company that pays dividends to their
shareholders, it enforces discipline. A CEO need to be more prudent since
he/she need to choose the more cost effective option with the better promise of
expanding earnings. It is this physiological caution that is responsible for
the superior returns generated by dividend stocks over long periods of time.
Charlie Munger once commented that it would be better for Berkshire Hathaway to
pay out dividends after Warren Buffett’s death. This would prevent capital reinvestment
risk that would pay most of its company earnings as dividend. The management
can’t be screwed up if the money is already given out as dividend payout.
In
Conclusion
After reading this article, you readers now understand the benefit of becoming a Dividend Growth Investor. Not only it provides stream of passive income during your retirement, you can also let someone else like your children or grandchildren to inherit the dividend growth portfolio you have built without selling a single share. In addition, Dividend Growth Investing strategy has been proven to perform much better than the overall market in and protects your money against inflation in the long term. I hope this article inspires you to become a Dividend Growth Investor and start investing as soon as possible. Remember, the earlier you start, the better result you will get in the future.
Hola from Manila. We are leaning towards dividend investing too. Building assets that generate passive income. Grats on your progress.
ReplyDeleteRegards,
Lex from
Santoscapital.wordpress.com
Thanks for visiting my blog and taking your time to read my article.
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