In my last post, I discussed the value of dividend paying stocks and how they could effectively place “brakes” on your portfolio but what about the accelerator? No, I am not suggesting anything dramatic here such as investing all your money in high tech or some exotic that will double the value of an index (BTW the latter doubles your losses too). Again, I am referring to the value of dividend paying stocks.
The benefit of dividends does not end with a company’s ability to pay those dividends. To see what I mean, let’s look at another example
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In 10 years, the value of the company stock that I referred in my first post has gone from $30 to $45 since the company has done well. (Yep no guarantee that companies will do this)
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The yield on the dividend is still 2.5%
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The actual dividend income per share is now $1.125 per share to still be 2.5% ($45x.025=$1.125)
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Since your original Investment in the company’s stock was $9000 or 300 shares, you are now receiving $1.125 per share annually or $337.50. Your yield is now 3.75% ($337.50/$9000)!
As you can see from this example, the value of dividend paying stocks is not limited to the downside. The dividend yielding stock can also work as an accelerator for your returns to the upside. This happens because the company has added to the income it pays you over time, increasing the yield they pay to existing shareholders. Yes, this is not guaranteed but there are companies where their mantel is to keep their dividend the same or increase it. There are even some companies that have been paying the same or increasing their dividends for over 100 years.
After digesting all this, here are some interesting questions to ask yourself.
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Bonds are generally considered a safer investment than stocks, right? How do bonds/CDs guarantee the income that they pay?
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CDs are generally FDIC insured
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Government bonds are guaranteed by the government
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Corporate bonds are guaranteed by the individual corporation that issues them.
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What is the difference between the interest guaranteed by a corporation and the dividend paid by that same corporation which has been paying the same or increasing dividend for over 25 years? This last statement assumes the company is financially sound.
What other questions should you ponder?
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Large established company stock values tend to appreciate over time.
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Do bonds values appreciate?
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Bond values can appreciate if interest rates go down
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However, at some point in time, the value of that bond will return to it’s original investment value of $1000 as it matures.
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Do stocks always return to the original value that you purchased them at?
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They can go down even below their original purchase price
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Stock values are not guaranteed by the government, FDIC or the company that issued them.
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If the stock’s dividend kept going up from where you originally bought it, do you think eventually investors would start buying the stock again?
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What is the effect of more people buying a stock than selling it?
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What companies are sound companies?
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Have you noticed the brand/company names of appliances in your house?
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How about the brand of car that you drive and fuel you use to fill it up with?
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Check out the company/brand name of the medicines in your bathroom cabinet.
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What kind of computer/phone are you using to read this post and who makes the components inside? (I don’t recommend opening it up to see).
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Check them all against the list of publicly traded companies. If you are buying these items, who else is?
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Do yields on bonds generally go up? Once you have purchased a bond or CD, the interest rate generally stays the same right?
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Have you investigated the history of established brand name companies paying dividends?
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Buying dividend paying stocks is not going to solve all your stock market woes but it is a good place to start when building a solid portfolio that will be less volatile than a portfolio of stocks not paying dividends. This portfolio may not provide the most stellar returns in an up market compared to portfolios of high flying companies but as the old saying goes “the bigger they are the harder they fall” and the value of the dividend portfolio is to apply some brakes on the downside and add accelerated income/stock value on the upside.