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Why Dividend Stocks Make Great Investments
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
May, 2008
In 1934, Benjamin Graham and David Dodd wrote in their classic "Security
Analysis," "The prime purpose of a business corporation is to pay dividends to
its owners." It was common thinking that the possibility of stock price increases
was speculative, so the main reason to own stocks was to partake in a steady
flow of dividends.
But 66 years later, at the end of the 18-year bull market of 1982 to 2000, many
investors had almost no interest in dividends. The incredible rise in share prices
during that long bull run dwarfed dividends' contribution to total returns.
Nobody would seriously say that the prime purpose of owning shares was to get
dividends.
As we all know, that bull turned into a bubble, and the bubble burst over the
three years from 2000 to 2002. When the dam gave way, it ruined the
retirement plans of thousands of people, and it sobered up many investors.
Since 2002, there has been a rekindling in appreciation for dividends and
dividend-paying stocks. Investors realize that a dividend stock portfolio can
lower risk, grow principal, and steadily increase income over time.
With good dividend-paying stocks, you can actually have both growth and
income. Dividends are stocks' secret weapon. Studies show that dividends have
accounted for nearly half--or more--of the total return of the stock market over
very long terms.
That may surprise you, considering how little publicity dividends get. There is
no widely reported dividend index that receives the attention bestowed every
day on the Dow, the S&P 500, and the NASDAQ indexes.
But all of those indexes reflect price changes only. As such, they give a very
incomplete picture of "how stocks are doing." No wonder dividends pass under
so many investors' radar.
Common misperceptions are that dividend stocks are--
--slow-growing and boring;
--an indication that a company cannot think of anything better to do with the
money; and
--good only for retirees needing income.
These notions are all incorrect. The fact is, dividend-paying stocks are attractive
as a core investment for anybody, of any age.
In fact, dividend stocks may just be the best investment that anyone can own.
Here are seven reasons why:
1. Dividend stocks offer a good total return. Remember, total return is the real
target, not merely price appreciation. Total return = price appreciation +
dividends.
2. Dividends are lightly taxed. The current maximum Federal tax rate on
dividends is 15%.
3. Dividend practices tend to persist. Dividend-paying companies are usually
solid and well established. The best of them cut their dividends seldom and raise
them often. Dividend increases often come at a much faster pace than many
people ever experience salary increases. (See #5 below.)
4. You do not have to sell the stock to get the dividend. It is simply sent to you.
You can do with it whatever you like: re-invest it, save it, or spend it. (See #7
below.)
5. Unlike bonds, dividend yields can rise over time. And the best dividend
stocks do just that. According to Morningstar, stocks in the S&P 500 have been
raising their dividends an average of 17% annually over the past three years. No
bond does that, and neither does your local bank.
6. Also unlike bonds, your principal can increase over time if it is invested in
stocks. Bonds are "fixed" investments: At the end of the bond's term, you get
back your original investment...in inflation-ravaged dollars. Stocks, on the other
hand, are historically the only asset class that outstrips inflation.
7. You can do anything you like with your dividends. Those dollars are not
"trapped" inside the ownership of the stock's share. If you are young, you can
re-invest them, perhaps in the same company, to build your wealth faster. This
brings the "miracle of compounding" into play. If you are a retiree, you can
spend the dollars as month-to-month income. Or anyone can do anything in
between: re-invest some and spend the rest, etc.
Owning dividend stocks is exciting, rewarding, and fun. Most investors--of any
age or stage in life--would be wise to have a significant portion of their
investments in dividend-paying stocks.
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
May, 2008
In 1934, Benjamin Graham and David Dodd wrote in their classic "Security
Analysis," "The prime purpose of a business corporation is to pay dividends to
its owners." It was common thinking that the possibility of stock price increases
was speculative, so the main reason to own stocks was to partake in a steady
flow of dividends.
But 66 years later, at the end of the 18-year bull market of 1982 to 2000, many
investors had almost no interest in dividends. The incredible rise in share prices
during that long bull run dwarfed dividends' contribution to total returns.
Nobody would seriously say that the prime purpose of owning shares was to get
dividends.
As we all know, that bull turned into a bubble, and the bubble burst over the
three years from 2000 to 2002. When the dam gave way, it ruined the
retirement plans of thousands of people, and it sobered up many investors.
Since 2002, there has been a rekindling in appreciation for dividends and
dividend-paying stocks. Investors realize that a dividend stock portfolio can
lower risk, grow principal, and steadily increase income over time.
With good dividend-paying stocks, you can actually have both growth and
income. Dividends are stocks' secret weapon. Studies show that dividends have
accounted for nearly half--or more--of the total return of the stock market over
very long terms.
That may surprise you, considering how little publicity dividends get. There is
no widely reported dividend index that receives the attention bestowed every
day on the Dow, the S&P 500, and the NASDAQ indexes.
But all of those indexes reflect price changes only. As such, they give a very
incomplete picture of "how stocks are doing." No wonder dividends pass under
so many investors' radar.
Common misperceptions are that dividend stocks are--
--slow-growing and boring;
--an indication that a company cannot think of anything better to do with the
money; and
--good only for retirees needing income.
These notions are all incorrect. The fact is, dividend-paying stocks are attractive
as a core investment for anybody, of any age.
In fact, dividend stocks may just be the best investment that anyone can own.
Here are seven reasons why:
1. Dividend stocks offer a good total return. Remember, total return is the real
target, not merely price appreciation. Total return = price appreciation +
dividends.
2. Dividends are lightly taxed. The current maximum Federal tax rate on
dividends is 15%.
3. Dividend practices tend to persist. Dividend-paying companies are usually
solid and well established. The best of them cut their dividends seldom and raise
them often. Dividend increases often come at a much faster pace than many
people ever experience salary increases. (See #5 below.)
4. You do not have to sell the stock to get the dividend. It is simply sent to you.
You can do with it whatever you like: re-invest it, save it, or spend it. (See #7
below.)
5. Unlike bonds, dividend yields can rise over time. And the best dividend
stocks do just that. According to Morningstar, stocks in the S&P 500 have been
raising their dividends an average of 17% annually over the past three years. No
bond does that, and neither does your local bank.
6. Also unlike bonds, your principal can increase over time if it is invested in
stocks. Bonds are "fixed" investments: At the end of the bond's term, you get
back your original investment...in inflation-ravaged dollars. Stocks, on the other
hand, are historically the only asset class that outstrips inflation.
7. You can do anything you like with your dividends. Those dollars are not
"trapped" inside the ownership of the stock's share. If you are young, you can
re-invest them, perhaps in the same company, to build your wealth faster. This
brings the "miracle of compounding" into play. If you are a retiree, you can
spend the dollars as month-to-month income. Or anyone can do anything in
between: re-invest some and spend the rest, etc.
Owning dividend stocks is exciting, rewarding, and fun. Most investors--of any
age or stage in life--would be wise to have a significant portion of their
investments in dividend-paying stocks.
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