What is Dividend Investing? Why Should You Do It?
The following is a guest post written by Mike from The Dividend Guy Blog and Dividend Stock Analysis. Mike has a MBA in financial services and writes about dividend investing since 2010. His goal is to use dividend growth power to retire early.
Mark (My Own Advisor) and I have been blogging friends for a long time. One thing we have in common is definitely our strong belief in dividend investing. When people hear the words “dividend investing” some think that we are talking about stocks paying 5% or 6% or 7% dividend. If you have been around for a while you’ve probably even benefited from the “black gold rush” with Albertan oil income trusts paying double digit dividends. If you want to become a successful investor, the first thing you should do is to ignore high dividend yield securities and concentrate on quality dividend stocks.
What is So Great about Dividend Investing?
Among all the investing strategies you can use, dividend investing is probably the one which can assure you the best results when you consider the time required. You don’t have to believe me; you just have to believe the past 85 years on the stock market:
Image source: JP Morgan Asset Management
Over that long period, 43% of the total S&P 500 return has come from dividend payouts. If you look closely at the chart, you will also notice that the S&P 500 shows 2 negative decades; the 1930s and more recently, the 2000s. In the 1930s the dividend investor could have offset his/her losses completely (-5.3%) by his dividend payouts (+5.4%). In the 2000s the impact was not enough to completely offset the losses but someone who has only dividend stocks in their portfolio certainly had a dividend yield paying more than 2.7% to offset the capital losses.
Since most of us invest for our retirement and not just today, being able to protect our capital is crucial, especially when you start withdrawing funds from your nest egg.
Index Investing vs. Dividend Investing
After the mutual fund revolution, we witnessed a new phenomenon during the 2000s; the ETF revolution. Inspired by Vanguard’s success, several investing firms now offer Exchange Traded Funds (ETFs) following any index you can think of. Since 95% of mutual funds don’t beat their referring index over 5 years, why would you bother paying high management fees when you can buy the index for less than 0.25% MERs?
If I’m almost 100% certain of making the index return with a very small fee, why would I start managing my own stocks and build a dividend portfolio? The answer lies in the control of volatility.
Historically, dividend stocks have been less volatile than the overall index. That totally makes sense since most investors seek stable sources of income during recessions. Since dividends are rarely cut by strong companies, it is one of the favourite investment approaches during a crisis.
If you compare “popular” dividend stocks to the S&P 500 during the worst investing year ever (2008), you get the following results:
S&P 500: -40.98%
As you can see, the four blue-chip stocks I’ve chosen above beat the index by far. Index investing believers are probably going to tell me that the S&P 500 jumped higher in 2009 than those stocks, right? Well, let’s look at the graph from January 2008 until December 2009 to see if the S&P 500 did better than those four stocks:
Coca-Cola is the only stock that under performed the index in this example. However, if you take the four stocks as a portfolio you’re way ahead the S&P 500 and I’m not even counting their dividends!
The Reason I Chose Dividend Investing
I chose dividend investing is because I wanted to count on stocks paying me more each year. When you select dividend growth stocks, you can expect to see your dividend payouts being increased year after year accelerating your wealth. It’s a great way to protect your money against inflation and to generate passive income month after month, quarter after quarter and year after year 😉
Do you pick only dividend stocks? What is the best investing strategy for you?