DIVIDENDS
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WHY DIVIDENDS ARE IMPORTANT

Over the long term, the return from dividends has been a significant contributor to the total returns produced by equity securities in markets studied.

Stocks with high and apparently sustainable dividend yields that are competitive with high quality bond yields may be more resistant to a decline in price than lower-yielding securities because the stock is in effect “yield supported.” The reinvestment of dividends during stock market declines has also been shown to generally lessen the time necessary to recoup portfolio losses.

The ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its earnings. This is particularly pertinent in light of the complexity of corporate accounting and numerous examples of “earnings management,” including occasionally fraudulent earnings manipulation.

In a troubled market, dividends provide investment opportunity

While everyone else is panicked about their portfolio’s decline, dividend investors see a downturn as an incredible buying opportunity. The lower a stock’s price goes the higher its dividend yield. In a down-market it is a lot easier to buy a stock that pays you an increasing dividend than one that doesn’t. Simply put, the dividend stock is paying you to wait on its recovery, while the non-payer may continue to decline of remain stagnate for years.

Dividends provide continuous feedback

As time passes dividend investors see their income steadily grow. You do not have to wait five to ten years to determine if the strategy is working. Each dividend and dividend increase provides the investor with reassurance that the strategy is working.This reassurance helps investors to the right thing in troubled markets.

Good dividend companies grow their dividends

You expect your employer to give you a raise periodically. Why wouldn’t you expect the same from your investments? Healthy companies are growing earnings and share price, thus to pay a competitive yield the company must also grow its dividend.

 

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