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Thursday, November 18, 2021

The Power of Dividends

Many investors regard dividend-paying companies as uninteresting, low-return investments. Dividend-paying stocks are usually more mature and predictable than high-flying small-cap businesses, whose volatility may be pretty thrilling. Though some may find this uninteresting, the combination of a steady dividend and rising stock prices might provide earnings potential that is compelling enough to be enthusiastic about. 
My portfolio used to consist of dividend-paying stocks; however, I had decided to use concentrated play like investing the majority of my portfolio is in Alibaba Group (Ticker: BABA). In a way, I regretted making this investment adjustment to my portfolio since my previous version portfolio is doing much better than the current one. I like my previous portfolio much more because I could receive dividends from holding those stocks in my portfolio. With the dividends payout, I was able to buy more shares of companies that I like. Well, there is nothing I can do about it now since most of my capital is invested in only two stocks, Alibaba Group (Ticker: BABA) and Pfizer Inc. (Ticker: PFE). 
Due to my mistake, I learn something valuable, which is not to underestimate dividend-paying stocks. In this blog post, I am going to explain the power of dividends. Moreover, I will explain why holding a portfolio of dividend-paying stocks can be an excellent stock investment strategy. Lastly, I am going to give my opinion on investing in dividend-paying stocks.
The Power of Dividends & Their Compounding Effect.
The ups and downs of market movements dominate stock returns in the short term, whereas dividends dominate stock returns in the long run. "What percentage of stock returns come from dividends over the long run?" is a common question, to which I have a straightforward answer based on the previous 40 years of S&P 500 returns: 75%. Dividends reinvested over time are part of the first and most dependable approach to profit from equities.
Today's graph compares a $100 investment growth in the S&P 500 without dividends vs. dividends reinvested. The S&P 500 index has climbed to 17.9 times its 1980 value, while $100,000 would have grown 52.9 times to $5,285,910 if dividends were reinvested.
When you think a 2% dividend yield is not much to get excited about, keep in mind that, unlike interest payments, dividends tend to grow over time since the portion of a company's revenues that is not paid out to you as a current dividend is frequently reinvested to increase future dividends. The latter issue, along with taxes, is one of the reasons I do not solely buy high dividend-paying stocks, but anything accounting for 3/4 of the S&P 500's fantastic return over the last 40 years is a significant enough component never to overlook.

S&P 500 Total Return: Dividends vs. Capital Appreciation.
According to industry data, corporations that pay dividends have higher returns than non-payers and have reduced volatility. While some investors may associate dividend payers with stodgy businesses with slow growth, dividend-payers can be found in many sectors and industries. Dividends can compel management teams to be more fiscally responsible, as they may otherwise be tempted to utilize capital on potentially dilutive purchases.

Average Annual Return & Volatility by Dividend Policy for Stocks in the S&P 500 Index – Period: March 31, 1972, to December 31, 2019
Many income investors believed that the best place to invest for stability was in the treasury or corporate bond markets. Treasury bonds can be a haven in times of crisis, but their yields have fallen dramatically following more than three decades of a bull market. Treasury yields in the United States are near all-time lows, thanks to global central banks reducing interest rates to near-zero levels and injecting trillions of dollars into the system.
Only a few times has the dividend yield on the S&P 500 Index been higher than the yield on 10-year US Treasury notes. Having stated that, the current situation is one of those cases.
My Opinion on Investing in Dividend Paying Stocks.
My portfolio consisted only of dividend-paying stocks, and I changed the investment portfolio strategy when I decided to have a significant concentration on Alibaba Group (Ticker: BABA). If we compare the performance now, of course, I regretted it since there is at least a $250,000 difference from my old portfolio to the current one (as of November 2021). However, I am still going to stick with the stock portfolio holdings for a more extended period. Maybe, I still have the opportunity to beat my old portfolio performance. Nevertheless, from this investment mistake, I learned something valuable: not to underestimate dividend-paying stocks. Yes, investing in a pool of dividend-paying stocks can be dull; however, this stock investment strategy can be a winning solution.
Personally, what I like about dividend-paying stocks is the dividend payout they issue every quarter. When I was managing my old dividend-paying portfolio, I used the cash flow from dividends to purchase stocks I like to buy, and I cannot do this anymore since Alibaba Group (Ticker: BABA) is not a dividend-paying stock. So when Alibaba's stock price goes down, I cannot use dividends I used to receive every month from purchasing more when the stock is at a bargain price.

The Bottom Line
Overall, while some investors may argue that dividends are a waste of money, these analyses show that dividend-paying firms outperform their benchmark in the long run. Some businesses aren't like this. Some companies, such as Berkshire Hathaway, have outperformed the S&P 500 without paying out earnings to shareholders. These businesses, on the other hand, are one-of-a-kind.
The evidence, on average, speaks volumes about the efficacy of dividends, particularly for long-term investors who aren't concerned with short-term success. Dividends, as we've shown, maybe a significant part of total return over time, with dividend-paying stocks outperforming non-dividend-paying equities in the long run. In this low-interest-rate climate, a dividend strategy can be extremely appealing. Nonetheless, not all dividend-paying stocks are created equal. So remember to focus on discovering high-quality firms that can expand dividends over time.

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