Steadfast FinancesShould You Invest in Dividend Stocks?

Should You Invest in Dividend Stocks?

Filed in Dividend Investing , Investing 101 3 comments

One of the questions that I have been thinking about more often as of lately is whether or not to start investing in dividend stocks. Part of it is to diversify my investments a little further. Currently, I have most of my investments tied up in 3 different retirement funds. It wouldn’t hurt to split this up a little bit further. While I plan to also incorporate real estate investing in the near future, that seems far away and failing to utilize my money now could be missing out on an opportunity to take advantage of compound interest.

Dividend stocks are talked about all over the internet because they offer something that traditional stocks don’t. The unique wealth accumulation structure of dividend stocks make them attractive to investors. Yet, I can’t help but wonder that if they are the better option, why everyone doesn’t utilize these to fill their investment portfolios?

What’s the Benefit of Dividend Stocks? Do They Live up the Hype?

A dividend is a payment or compensation made by a company to its shareholders. In other words, those who own stock in a particular company will receive this dividend on a regular basis. They are attractive to investors for two reasons. The first is a little diversification within the stock itself. Not only do you have the option of increasing the value of your holdings as the stock value increases, but you also receive a regular dividend payment. This seems to be fit both approaches to retirement. For those interested in building an income stream (and see retirement as building passive income to replace their day job), the dividend aspect becomes particularly attractive. For those wanting to build up a nest egg to live off of, it also accomplishes this with both aspects. It seems to be a win-win opportunity.

To confirm the reason why dividend stocks are so attractive, Thomas Kenny writes on,

“High-dividend stocks tend to outperform the broader market over time. From January 31, 1972 through September 30, 2010, U.S.-based dividend-paying stocks returned an average 7.1% annually, far exceeding the 1.5% average annual return for stocks with no dividends. This trend continued through 2011. Additionally, more than half of the total return of US equities from 1930 through the end of 2010 was the result of dividends rather than price appreciation.”

Thus, not only does the basic payment structure of dividend stocks seem more intuitive to investors, it also has a great track record.

How to Get Started Investing in Dividend Stocks?

Since dividend stocks seem to live up to the hype, I am half-way tempted to open up an account and get started. Yet, I don’t want to jump in to quickly. I want to do my homework first. That is why I am going to do everything I can to learning the in’s and out’s before jumping in to the deep end. There are many great resources out there – some free and some paid subscriptions.

One example is Dividend Stocks Online. From doing some investigation, it offers a great wealth of information for its members. It helps categorize the dividend stocks so that you can be better informed when selecting which stocks to select. While I’m not at the point of committing to investing right now, I do know that I will consider services like this one as it could mean a difference of tens of thousands of dollars in returns over decades of investing.

Have you thought about investing in dividend stocks? Why or Why not?


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Posted by CJ   @   10 August 2012 3 comments
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Aug 10, 2012
11:59 am

I do. There are two types: common and preferred stock. A lot has been written about common stocks that pay dividends (Google dividend aristocrats), so I won’t belabor that point, except to say even when the market is flat, this is an almost guaranteed way to keep making money.

I discovered the preferred kind only after someone posted it somewhere a few years ago. They are listed, but rarely show up on screeners or searches. You have to know the symbols and that’s a bit of a pain. They’re often thinly traded, but they are one of the classic buy and hold stocks – very close to bonds. They pay a fixed dividend – in my (admittedly limited) experience they all hover around 8%, so there’s no growth in the dividend, but it’s higher than common stock yields.

I was fortunate in that by the time I started looking into them, several had suspended dividends. However, most of the dividends of preferred shares are cumulative, which means they have to pay out the suspended dividends at some time. And so I ended up buying a lot of these with up to two years of dividends accumulated. That meant a 24% return (current year + 2 back years) in the year they get caught up. This is the year for many, at least it is for the ones I got. Nice little boost, but the kind of thing you only get in a recession.

One of the reasons recessions are such a good time to go shopping… if you have the cash.

Aug 12, 2012
11:17 pm

We do invest in dividend stocks with extra monthly padding money (money left after bills, emergency fund savings, and Roth IRA investments). So far, they have worked out very well for us. I can personally suggest Johnson & Johnson for stability and decent, consistent returns. Good luck!

Aug 27, 2012
1:06 pm
#3 Matt :

I started my Roth IRA my first semester at college and have maxed it out every year since. While the balance is still relatively modest (curse those contribution limits), my contributions have experienced some great growth that I attribute to it being exclusively a dividend focused portfolio.

My strategy is to select strong, established companies with a diversified product line that pay strong dividends (though I’ll look at any with a >2% yield, so far all my investments have been into those yielding from 3.5-6%). All dividends are reinvested, of course. So far, because of the defensive nature of most “dividend companies”, my investments have soared and are continuously building on themselves because of their great dividends. I recommend you continue to do your research and eventually make the jump into dividend stocks. I’m sure you won’t be disappointed.

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