John Heinzl of the Globe and Mail and I agree that dividend investing is something everyone should be doing. It is easy and grows your money with limited risks. In an recent article, Mr. Heinzl wrote about 10 reasons why it is one the simplest and most effective ways for small investors to build wealth. Once you have the wealth, there are many options including keeping most of your money in dividend stocks.
- It is Easy to Understand – A company makes a profit. Part of the profit goes into the company to be reinvested, the other part goes to shareholders. The trick is to have enough to do both, if it does then the reinvested profits can lead to capital gains.
- Dividend investing has Produced Superior Returns – Dividend investing can beat the indexes, otherwise you should buy index funds. The returns are even better when dividends are reinvested, but you can do with the dividends what you wish.
- Dividends Help You Stay out of Trouble – in general, dividend companies tend to be the large well managed companies. Large well managed companies tend to execute their business plans and generate cash to be profitable. If you think of the typical dividend companies – the utilities, power producers, banks and telecoms all of them have people paying bills on a monthly basis and some are regulated by the government.
- Dividends are Stable – Stock prices go up and down, dividends payments are more stable and predictable. With dividend payments, you can do an cash flow analysis of when to expect your dividends and then check your accounts to see the money has flowed in. In addition, because of the dividends, stock prices tend to fluctuate less than non paying dividend companies.
- Dividends Reinforce Buy and Hold – stock brokerage companies make their money from buying and selling stocks. You make your money from buying a profitable company that can pay dividends and because it is profitable trades at a higher multiple than non profitable stocks. When the market goes down, it is okay as long as the company can still pay a dividend – you wait, received the money and you can either reinvest in that company or buy something on your list which has gone down.
Linking to dividend paying stocks all the above are great reasons to own dividend companies. Lower the risk, increase the reward and try not to lose money.
There are more questions than answers, till the next time – to raising questions.