Saturday, January 8, 2011

The Power of Stock Dividends

Dividend-investing used to be the norm between the 1930s and 1960s. Wives were outliving their husbands. So, how did the wives survive after their husbands were gone? You guessed it. These widows invested in stocks that paid dividends. Back then, it was such a common investment strategy that people started calling it the "Widow's Portfolio".  Not only the widows did it, insurance companies, investment banks and funds started doing it too.

However, the huge multi-year bull run in the 1990s changed all that. Dividends investing fell out of fashion. It was considered boring, dull and less profitable. A new generation of greedy investors and traders wanted to earn a quick buck in the short term. Everyone thought the era of income-investing was over. Everyone was going for capital gains.

Fast-forward to the present day. In the aftermath of the 2008 subprime crisis, more savvy investors (especially the Gen-Yers) are flocking back to dividends-paying stocks and for good reasons too.

1. Offers regular cash flow on top of capital appreciation

2. Offers support for share price during a market downturn. 

3. Less volatile price swings

4. A sign of healthy balance sheet and sustainable business model

5. Compounding effect of re-invested dividends

Now, I know all of you are thinking. There are countless stocks offering dividends in the market. Does it mean any stocks that offer dividends are good stocks? Of course not! Just like buying anything, when it comes to dividend-investing, we must be selective too. We want to buy a goose that lay golden eggs. 

I shall share a few criteria for selecting income stocks in my next post.

Do you think dividend investing is a good strategy? Share your thoughts by commenting below.

Peace Out,
Dividends Warrior

1 comment:

Penny Stock Blog said...

I like the idea of investing in stocks that pay nice dividends. But I also would invest in convertible preferred securities. These securities have a more stable price performance unlike common stocks that pay large dividends.