This is a guest post by Evan. Evan blogs about the stock market, dividend investing, and personal finance at Stock Investing 101 Many investors, and companies for that matter, are moving away from dividend investing. Investors are more interested in flashy, expensive companies now more than ever. Ten years ago technology companies were all the rage, these days foreign companies are what’s “in style”. Value companies that have traditionally paid out hefty dividends are beginning to do different things with their profits such as stock buy backs.
History shows this is a mistake
As you can see dividend paying companies outperform companies that do not pay dividends in both the short and the long term.
Besides the obvious advantage of getting better returns over time, there are several “hidden advantages” to investing in dividend paying companies.
There is less work involved in investing in dividend paying companies. An investor focused on putting his or her money into dividend paying companies needs to do a sufficient amount of research. They should make sure that the company is profitable, make sure the dividend yield is significant [over 2%], they should make sure that the dividend has been increased over time, and that the company is poised to grow and become more profitable each and every year. After the initial purchase however, things should be on autopilot for the most part. Dividend investing is not about trading and trying to make a quick buck; it is about buying and holding for as long as you can. You should still monitor your investments and make sure that the companies you are investing in are still doing well, but the work involved in dividend investing does not even compare to other types of investing.
When you are investing in dividend paying companies and you plan on buying and holding for the long term, you only need to be correct once, in which company/companies you buy. When you are trading or at least more active in trading, you need to be right three different times to be profitable. You need to be correct in your assumptions of what company to buy, when to buy it, and when to sell it. I do not know about you but it is hard enough for me to be correct once, let alone three different times. If professionals have a hard time profiting from rapidly buying and selling companies with little rhyme or reason, what makes you think that you would be successful in doing so? Warren Buffet did not make 40+ billion dollars from investing in companies he knew little about and then quickly selling them. Buffet buys a stake in a company and expects to hold the company for decades, not days, weeks, months, or even years.
There are less low points in dividend investing. This is a documented fact. You will not completely avoid recessions, depressions, or simple downturns in the market by investing in dividend paying companies, but you will experience higher and less “lows”. Dividend paying companies are much more stable then companies that do not pay out dividends for several reasons. Dividend paying companies tend to be profitable and they tend to trade at lower valuations. Also investors do not put their money into dividend paying companies with the intention of selling the next day, they buy and hold these companies for the most part.
There is simply much less risk involved in dividend investing. Not only will you get better returns in the long run, your portfolio will be more stable and you will not have to do nearly as much work. It’s a no brainer!