The Amazing Power of Dividends

What exactly is a dividend? A dividend is defined as the portion of the earnings of a specific corporation that are distributed to shareholders. Dividends are generally paid on a quarterly basis. While I think most investors likely realize that dividends are a nice little addition to a portfolio, I don’t think that most realize the extent of the benefits of investing in dividend paying stocks. Dividends are beneficial in all market environments and though sometimes these stocks may seem boring, boring stocks can make you a large chunk of change over time!

Dividend Paying Companies Have Healthy Balance Sheets

As a general rule, dividend paying stocks have strong balance sheets, which is why they are able to pay dividends in the first place. Wise investors will always want their money in a company where they feel like the balance sheet is pristine. As corporations feel more comfortable with where they are financially one of the first moves they typically make is to start paying dividends to shareholders. There are obviously exceptions to this rule of a great balance sheet for dividend stocks, but it is usually the case.

Dividends Offer Stability

Dividends are particularly powerful in a market where there is a great amount of uncertainty. While these stocks often move lower in a bear market, they almost never move down by as much as the average stock. Why is this? Quite simply, a dividend provides a bit of a floor in the price of a stock. The dividend helps to keep the stock afloat because investors know that the dividend yield alone is worth buying the stock once it has sold down to a certain level. Another important factor in the price staying more stable is that dividends often attract long-term investors who aren’t nearly as fickle. Dividend stocks offer stability that the majority of the market cannot match.

Dividends Put Money in Your Pocket

The most basic of the advantages of dividend paying stocks is that they add to your profits in an extremely sneaky, but powerful way. While the dividend yield of a stock may only be about 4%, you must realize that this is about half of the average yearly gain for stocks. This means that simply owning this dividend stock is giving you a chance for an extra 50% in profits per year if all other things are considered equal. Also, remember that when interest rates are set as low as they are right now, there simply aren’t any other savings rates that will pay you as healthy of a yield as a solid dividend stock.

Reinvesting and Compound Returns

The ability to reinvest in a company’s shares over time through dividend payouts allows an investor to increase the amount they own in that stock without paying any fees at all. At the same time compounding returns from those dividend payments as well as any capital appreciation will go a long ways toward putting more money into your investment portfolio. In the end investors often find that because of the power of compounding returns, capital appreciation in the shares of a dividend paying stock are simply icing on the cake!