*I am not a financial advisor. None of this is intended to be financial advice.
The stock market is a broad place where there are vast amounts of styles of investing from growth to dividend investing to a combination. Some prefer tossing money into ETFs to lessen their work and bet on the growth of indexes like the S&P 500. Investing in growth companies have the potential for high returns but also high losses. It is popular because of the likes of companies like Amazon, Facebook, Netflix, and even Apple and Microsoft (both of which do pay dividends but are currently paying under 1% in dividends). Hopefully by the end of this blog I can get you into the world of dividend investing, if you have not tried it out yet, and hopefully you can see some of the benefits and upsides that it provides.
What is Dividend Investing?
First things first, we must understand dividend investing. Simply, there are a ton of companies that pay you as a investor to invest in them. Usually, these are called dividends. Companies do not need to do so, but many do to continue the relationship between themselves and the investor. With investors investing money into the company, the company can use the money to continue to grow. Dividend investing is taking advantage of this exchange between company and investor. There are companies who hold titles of dividend aristocrats, companies who have increased their dividend payout for minimum 25 years.
Why I Love Dividend Investing
I personally think dividend investing is amazing and what it can do for your stock portfolio. It typically leads to more security at the expense of growth of the stock price. Take AT&T, for example, who has a 7% dividend payout as of writing this blog, the stock price has hardly any growth. However, it is a dividend aristocrat where the dividend has been paid and increased for over 25 years. This stock has a lot of security, in terms of its dividend payout, but does not have the growth in the stock price itself.
In addition, we have to consider that every year inflation drops the value of our money. Inflation is typically controlled by the Federal Reserve to about 2% every year meaning that next year, $100 today will be worth $98. Thus, the dividend stocks will have to increase their payout by at least 2% to beat inflation. AT&T has consistently increased its dividend payout by 2% which at least beats inflation, meaning that the 7% dividend is pure gain. Assuming AT&T stock never appreciates, and its dividend history holds, then a certain 7% increase is consistent.
Dividend investing gives investors peace of mind, especially if they had hand selected the companies carefully. For the first year or so that I have been a dividend investor, I have been very happy. Even throughout the pandemic, over 90% of the companies I invested in for dividends continued to pay the dividends and many even increased their payout. Many are scared when stock prices taken, and end up taking a heavy loss, selling at the bottom, as the share prices eventually resurgence. As the stock prices go lower, I buy more shares and watch as the market takes the stock prices higher. In fact, when share prices drop, dividends that are reinvested buy a higher percentage of a share.
Two weeks ago I blogged about investing in index funds and its pros and cons. One of the pros I mentioned was the simplicity and the 10% averaged annual return over a long period of time. Dividend investing on the other hand equates to growth in blue chip companies, but also able to receive the dividends and be able to reinvest them to further grow your portfolio. If you are up for a bit more risk for more chance of growth, I believe dividend investing can easily become one of your best friends in investing. Try it out and let me know how it goes for you in the comments section below if you do. But until next time…
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Checking out, Kenny
P.S. If you are interested in investing and you want to see our take on popular stock brokerages, check it out here.