I first started investing in stocks over two years ago in growth companies. These companies generally focus on reinvesting their profits back into the company to grow into other markets, niche, or just focus on growing within their current market. This is great in certain companies such as Amazon, Netflix, Facebook, and other less popular, mainstream stocks. These companies are extremely well-known and are constantly producing new products or services that their long-term customers gravitate to. However, to diversify your stock portfolio, there are other sectors outside of tech that should be explored. This is where investing in growth companies can get risky. There is risk in investing in general but the smaller growth companies bring another level of risk into it. This is where dividend paying companies come in the picture.
Dividend paying companies provide a sense of security that growth companies cannot. Being paid a dividend in a company in which you have no other ties to or need to invest your time can be exhilarating, knowing that you do not need to do anything else except parking your money there provides another stream of income.
Investing in these dividend aristocrats have really made investing easier in my eyes. I personally have one account where I invest in these dividend aristocrats, use its reputation and constant dividend hikes to help me grow my account. These companies tend to be blue chip stocks that have a strong financial history backed by their willingness to increase their dividend payout over a long period of time. Take a look at this graph below that shows the performance of Dividend Aristocrats vs the S&P 500 index…
Now imagine the growth that is possible when you take this 10 year performance to 20 years, 30, 40…It is something to highly consider. The main difference between the two is the reliability of the dividend payouts that will help with the growth of your portfolio.
The key is to identify the companies that you can really believe in. This is the most important step as currently there are over 60 companies in the list of dividend aristocrats. I took a couple of days to really narrow down my criteria (dividend payout, market capitalization, sector). This makes my life easier every time I want to invest as I can transfer money into the brokerage account and then continue to invest more into companies that I have shares in already.
Downsides That I Have Experienced
While this sounds all rosy, investing in these dividend aristocrats do not come without its downfalls. The most common is that the stock prices tend to trend upwards rather slowly. This can deter investors who want the growth in the share price. A lot of these companies have established their niche in the world and are either not expanding much or at all. Companies such as Target and Lowe’s fall into this category as both are Dividend Aristocrats. Both have established their niche and their loyal customers and continue to profit. In the current time that I am writing this, we are in the midst of a contraction period where smaller companies are suffering, but larger, more established companies are thriving. Both these companies smashed their recent quarterly earnings, sending their share prices skyrocketing. This is a rare occurrence as Dividend Aristocrats rarely have steady share appreciation of over even 5% in a given year.
Honest Opinion on Dividend Aristocrats
I have found that investing in these types of companies are valuable for those who have time on their side, AKA those who are younger or do not need the money in the near future. It is an easy way to compound your money with less volatility and risk. For those who need to grow money quickly, I can confidently say that Dividend Aristocrats are not the solution. But for those who have luxury of time and are willing to put in a bit of research of which companies are reliable and steady, investing in these types of companies will be beneficial and low stress. But until next time…
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Checking out, Kenny