Why You Shouldn’t Discount Dividends

Hi everyone! Welcome to the virgin edition of Stock Market Saturday (SMS). I’ll be serving up one article each Saturday devoted to all things stock market. This week’s edition I’m taking a deeper dive into dividends – hooray! You may end up rethinking the way you select your investments when you better understand the impact dividends can have.

What’s a Dividend?

Dividends are a distribution of part of the companies earnings (usually in cash, but can be stock or property) to shareholders. Typically, stable and mature companies will pay dividends to keep investors – you and me – interested in the stock. Would you want to invest in a stock if the price hadn’t moved in ten years? Heck no! We’ve got much better things to do with our money than let it go stale. A dividend offering says, “Hey investor. We know we make a lot of money and we probably aren’t going to grow the stock price much more. We’ll give you some of our earnings, so you don’t have to rely on the stock price going up to make money.”

Dividends are usually referred to as dividends per share (DPS) or as dividend yield. Dividend yield is a percentage, calculated as dividend price divided by the stock price. They can be paid at any interval – monthly, bimonthly, quarterly, twice yearly, or yearly.

Note: Beware! Companies with a dividend yield much higher than others in their industry are at risk to reduce or eliminate their dividend.

Stock Dividend vs. Price Appreciation

How important are dividends to your earning potential? Extremely. Check out the table below:

S&P Dividend Table

See that number in the bottom right? 41.8% of all gains in the S&P 500 for the last 80 years came from dividends, not from the stock price rising. That’s huge! This is partly because prices go up and down, but you’ll never get a negative dividend. This is truly a testament to the adage, “slow and steady wins the race.”

Dividends aren’t sexy. They aren’t glamorous. You won’t brag to your coworkers about how you earned a 5% dividend on a telecom stock like if you had invested in a biotech stock and it went up 500%. But, the proof is in the pudding table. Dividends hold their own against price appreciation and, when you consider that dividend stocks can also rise in price, it becomes clear why you should prioritize stocks that offer dividends over those that don’t.

– Sam

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2 thoughts on “Why You Shouldn’t Discount Dividends

  1. Hello from r/FI.

    You wrote:

    > when you consider that dividend stocks can also rise in price,
    > it becomes clear why you should prioritize stocks that offer
    > dividends over those that don’t.

    The fact that dividend stocks may also rise may sound good, but it is not good for your overall long-term returns.

    The key advantage of dividends isnt to collect them, but to _reinvest_ them. Only when you reinvest them you get the compounding to work for you.

    And when you want to continously reinvest them, you do not want the stock prices to rise. Even if looks good in your portfolio for the shares you already have, it makes those you yet want to buy more expensive. So you want them to stay flat or to fluctuate, so you can reinvest when the price is down.

    You want stock prices to rise only when you do not plan to ever buy more of them.

    Like

    1. Welcome! Great insight. Doesn’t that really depend on whether the company increases their dividend to maintain the yield?
      If I get 4% regardless of the price, then the price increase won’t matter for reinvestment because I can still increase my share count by 4% through a DRIP.
      If the company is only going to pay a flat dollar amount per share, however, then you’re absolutely right, long term it would be better for the stock price to stay low so you can increase share count and hope the price goes up later in life when you cash out.

      Like

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