A dividend stock investment strategy has historically given investors much of the growth potential of stocks but with smaller losses during market sell-offs—a blend that could be intriguing for investors seeking a mix of income, stability, and growth.
There are at least three key reasons to consider dividend-paying stocks as part of a well-diversified portfolio.
1. The importance of dividends to total returns
A lot of investors love to talk about stocks that hit home runs: a new biotech breakthrough or tech craze that catapults shares to new highs. Do not be flown in the wind too – Do Your Homework. To get a good return from a superior dividend paying stock you need
- An Initial Investment
- Dividend Reinvestment Plan
A Dividend Reinvestment Plan is a plan that is generally offered by companies to enable shareholders to reinvest their cash dividends for purchasing additional or fractional shares in the company. This type of reinvestment on the day of dividend pay would enable you to get a compound interest on your investment and is highly recommended by experts.
2. A history of smaller losses
Companies generally start paying a meaningful dividend once they reach a certain level of maturity as a business and their earnings have become more stable than less established companies. This maturity can help to insulate them during sell-offs.
While dividend stocks do suffer periods of losses, such periods have tended to be smaller than those of the market overall, however if you are confident of the company’s performance you should give time for them to recover and begin giving better dividends.
During up markets, high-yielding stocks have historically underperformed the broad market slightly but still captured a meaningful portion of the gains. This usually is the case of corporate companies and those which have a long establishment history with franchisees spread out globally.
The combination of smaller losses and similar gains has led to returns close to the stock market over a full cycle but with less volatility.
Getting worried over a smaller loss when you know the company would eventually perform well is unreasoned and is not necessary.
3. Growing income
While inflation or rising rates can eat into the value of a bond and its fixed income payments, dividend payments have the potential to grow over time, and the stock may increase in value as well. That makes a dividend income stream an appealing source of income, particularly if you expect inflation.
In fact this kind of investment is better when compared to commodities which do not always grow but to see their doom days too. In a case where inflation is the order of the day choosing dividend paying stocks is the safest mode of investment.
Getting a payment every three months in fact brings about a boost in your overall investing environment and would give you satisfaction of earning bonus. The only caution you need to take is when choosing the stocks and then you can sit back and enjoy the constant payments.
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