There are three ways for companies to utilize their earnings. They can reinvest into their business through higher wages, expansion, or other realms of development; they can execute a stock buyback that will lead to higher dividends for investors or issue dividends. A dividend is a reward given to company shareholders, often in regular cash payments. This reward is typically a portion of the company’s profits, and corporations provide it as an incentive for investors to keep holding on to their shares. In this article, we provide some key reasons investors should specifically seek out dividend stocks and how they compare to their non-dividend-bearing counterparts.
Companies give their shareholders a return on their investment through share buybacks and dividend payments. Share buybacks are more versatile than dividends since companies can alter how much stock they repurchase as they deem necessary. By contrast, dividends are difficult to adjust due to the negative message corporations put out when they reduce the payout. The lack of confidence fallout from lower dividends typically leads companies to remain consistent in their dividend payments rather than altering them. Therefore, they prefer to utilize share buyback strategies instead.
Investing in companies that pay dividend yields can be beneficial as these tend to have higher relative profitability and lower debt. Strong corporate finances indicate a company’s ability to sustain its dividend, demonstrating the predictability of its income. Quality companies have growing markets, competitive advantages, and intelligent capital allocation – all of which help to contribute to overall positive performance for investors.
Compound dividend investing is an investment strategy that enables investors to make passive income from the dividends paid by stocks, ETFs, and other securities. With this technique, you can reinvest your dividend payments in order to receive even higher payouts over time – it’s what makes compounding so powerful! As your account grows, each of your reinvested dividends will yield more per share than before due to compounding.
You will still receive dividends if the stock market is flat or even down. Using a dollar-cost averaging strategy, you can purchase stocks at a ‘discounted’ price and lower the average cost per share in your portfolio, providing stability and a cushion against volatility, as shown in the above video.
The case is clear. We should nearly always seek assets that provide dividends if we want to grow our savings. Other popular investments, such as gold, may rise in value, but they will never provide the compounding interest opportunities of dividend-bearing assets.
Reach out to us today to discover what dividend stocks, ETFs, or Mutual Funds are a good fit for your investment portfolio and overall retirement strategy!