For those of you who are unfamiliar with what a dividend-paying stock is, it basically means that the company behind the stock will distribute a share of the overall profits to the people who have bought their shares.
Essentially, regardless of the growth or decline of the stocks over time, the investors are always guaranteed to receive a certain amount of payment as long as they are still shareholders.
So you can see that it’s beneficial right off the bat. Not every company does it, and some companies are still great investments without it
When you look a little deeper, the benefits of this type of investing become even more numerous. Let’s take a look at some of the reasons why you should really consider investing in dividend-paying stocks:
Companies are More Careful
What you’ll often find happens after you invest in a particular stock is that the company will feel the need to spend their earnings on mergers and acquisitions. This is just how it goes when companies start to see increased profits.
For the most part, this isn’t a good thing for investors. What this can lead to is a company having to reduce the funds dedicated to its shareholders in favor of things like salaries and pension packages for their increased workforce.
Maybe this is positive overall for the company itself, but certainly not for the investors. Those companies that pay dividends, however, would usually be disinclined towards mergers and acquisitions on account of having a commitment to those who’ve invested.
In all likelihood, their shareholders selected this particular company to reap the benefits of its high dividend yield. And so if this number was to fall, then the shareholders would likely take their money elsewhere.
And so, a company can increase in size on a consistent basis and the dividends will keep increasing with it instead of slowly starting to dissipate. Of course, some companies will be an exception to this, but for the most part, you can trust that they won’t want to run such a risk.
Exponential growth is a way in which the quantity of something will increase steadily over time on account of a number of different factors. It will occur when the instantaneous rate of change is proportional to quantity.
In the case of stocks, when there is a change in the stock that has an effect on the quantity of the stock and as a result the amount of money that is made by the shareholders who have invested in it.
Now, this doesn’t happen automatically and it’s not exclusive to dividend stocks. It takes some further activity on your part after your initial investment. Take a look at this detailed example of how Dividend Growth Compounding works.
As you can see, you can do something similar with non-dividend stocks, but the overall return on investment is not even going to be close to what you’ll get with dividend stocks. What you need to do is reinvest your dividend earnings every year.
Over a 30 year period, you will see an increased income from your shares that’s over double the increase you will see if you do the same with regular investments. These returns will be astronomical in size if you do this right, and it’s only possible with dividend-paying stocks.
“A good example is the energy sector which holds promise for their dividends. They are facing real development being also one of top sought areas considering careers in both renewable energy and oil&gas industry.”
Inflation can be catastrophic for investors. Let’s say you are making a 10% return on investment and then half of that has to be subtracted for inflation. You’re down to 5%.
That’s entirely out of your control and it’s a very discouraging return on investment. A company is doing well and in theory, it should have a high ROI, and instead, you’re basically just getting screwed by inflation.
But your dividends could potentially counteract that. Dividends will not be affected by inflation, or will at least not be affected in the same way. In general, dividends are a fixed rate that is paid out regardless of the companies performance.
Investing is a great way to gain some extra cash and a great way to set yourself up for the future. But you have to know what you’re doing.
I would advocate for anyone who wants to invest, to put the focus on dividend-paying stocks, but I think that it’s especially important for beginners. As you can tell from these points, dividend stocks are the financially smart option for you.
About the author: Rebecca Rinard writes on different topics as a well-versed writer in many fields but her expertise are business, entrepreneurship, crypto, and startups. She has been working as a freelance author mainly for ambassador websites but today she has strong relationships within financial niche which she is focused on, solely.