Buy low and sell high is not the only way to make money in the stock market. There’s also a technique known as “buy and collect dividends.” Buying stock for dividend payments is not a “get rich quick” scheme. It could be a “get rich slow” tactic or just “build wealth without an ulcer” tactic.
Among companies that regularly pay dividends (shares of profit paid to investors on a regular basis) are some of the strongest, most reliable companies in the world. According to Warren Buffet, they include International Business Machines (NYSE:IBMC), Walmart Stores (NYSE:WMTC) and The Coca-Cola Co. (NYSE:KOC) to name just 3.
By its nature, the stock market is volatile. Many investors seek consistency to help smooth out the rough times. Consistency (though no guarantees) can be found in dividend-paying stocks. Since 1960, 29% of the Standard & Poor’s 500-stock index returns have come from dividends. These stocks provide a cushion against the ups and downs of the market. They feature lower volatility and a higher Sharpe ratio (risk versus return).
Over the long-haul dividend payers tend to outperform non-dividend payers and offer impressive tax benefits as well. Qualified dividends are taxed as capital gains rates. Inherited stocks ban be passed on at current value allowing your estate to bypass paying capital gains on those holdings. This leaves more money to your heirs.
In looking for the right dividend stocks it is important to focus on the strength of the company, not the current dividend being offered. Look for companies that have a long history of delivering reliable dividends. Companies with decades of dividend paying history will keep doing their level best to continue doing what they have been doing.
Less reliable companies sometimes offer “teaser” dividends and then, once you buy the stock, pull the dividends or reduce them significantly. Although past performance, as they say, is no indication of future success, a history of reliable dividend payment puts you on more solid ground than no history at all or, worse yet, one that is sketchy at best.
Don’t Ignore CostsJust because a company pays dividends doesn’t mean it’s inexpensive to own, especially if your stocks reside inside an expensive mutual fund or ETF. Dividend-centered investment funds, in fact, are often more expensive than broad, diversified funds – irrespective of whether there are dividends or not.
It’s also possible to fall into a trap of seeking a fund that concentrates on dividends at the expensive of diversity. Diversification is one of the most essential elements when it comes to controlling or mitigating risk in investing.
Related: RESOLVE TO DIVERSIFY IN THE NEW YEAR
Dividend-paying stocks can provide stability to your portfolio but shouldn’t be the only thing you hold. Just because you like the consistency of dividends doesn’t mean you should ignore growth to make money as well.
A total-return philosophy that includes dividends keeps you in both camps at the same time. It also forces you to do your homework always. Keep in mind that most investors tend to gravitate toward income-producing (dividend) stocks later in life, so it is always important to know as much as you can about the dividend side of investing.