Dividend Stocks Are Proven Long-Term Winners

It terms of cumulative returns, you just can’t beat dividend stocks, especially compared to investing in non-dividend payers

Lior Gantz | April 3, 2020 | SmallCapPower: It’s tough to find decent yield in an overpriced equities market. That’s why so many people look to us for new ways to boost returns in their portfolio; everyone wants a new method, a new strategy. And while I’m definitely looking at new ideas all the time, there’s something to be said for time-tested strategies that have brought wealth to patient and cautious investors.

(The following article was originally published on wealthresearchgroup.com on August 6, 2018 but is still relevant especially in today’s market environment)

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I would classify dividend investing as one of the more secure methods of accruing real wealth over time. But, how do you go about it?

It starts with identifying solid companies that have withstood the test of time. These are the types of companies that I like to add to my own personal portfolio and hold them for the long haul. After all, you can’t enjoy the benefits of dividend investing if you don’t hold on to your stocks.

Holding one’s stocks involves a level of discipline that must be developed, but when we look at the profit potential from this method, it will become sufficiently clear that the discipline will pay off big-time.

You see, when you invest in great companies that yield decent dividends, and when you reinvest the dividend payouts into more shares of those stocks, you’ll benefit from the compounding effect. That’s because you’ll have more shares to profit from after you’ve reinvested, which means bigger dividend payouts, and then you can reinvest those dividend payouts, which means you’ll have more shares to profit from…

It’s a continuous cycle that will increase your returns and will allow your patience and discipline to reward you with a bigger and bigger investing account.

It terms of cumulative returns, you just can’t beat dividend stock investing, especially compared to investing in non-dividend payers:

What we’re seeing in the chart above is a dollar eventually turning into $5,000 instead of $1,500 due to the compounding effects of dividend reinvestment. If that chart doesn’t convince you, I don’t know what would. It’s a stark difference which might not be noticeable in days or weeks, but will really add up as the months and years pass.

Because dividend-paying stocks tend to represent superior companies that hold up better during recessions and other market fluctuations, dividend investors generally experience a less rocky ride and enjoy a greater peace of mind. This is due the reduced overall volatility involved with dividend investing, leading to a higher Sharpe ratio, which is a common measure of the reward-to-risk profile of in investment. We are fully dedicated to keeping the potential rewards high and the risk low, and that’s why I use dividend stock investing as one of my most reliable sources of income.

For truly superior wealth, the numbers and the research favor dividend stock investing. Using the S&P 500 as a benchmark once again, we can easily see how annualized returns are the best with dividend stocks, and especially with companies that consistently increase their dividend payments:

On the other hand, when companies decrease their dividend payments, the outcome for investors tends to be the worst.

So here we have an indispensable tip for dividend investors: it’s not only about high dividend rates, but also about increasing dividend rates. The true dividend kings are those companies that constantly increase their dividend payouts on a percentage basis; it’s a best practice to seek out those companies and buy and hold the best among them, which is precisely what I have done for many years.

To increase your dividend expertise, you should know that most dividend-yielding companies pay out dividend once every quarter or three months. It’s a smart idea to watch for those payments and keep track of which companies pay dividends and when.

Also, it’s a good practice to track the dividend payouts in percentage terms, and note when companies increase their dividends and when they don’t. If a company is cutting their dividends – that is a red flag.

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