The value of investing in dividend paying companies is often overlooked in today's market. Investors are seeking growth, but yet they forget that dividend paying companies can be just what they need.
First of all, investors know that a dividend payout is a return to shareholders that is issued quarterly, semi-annually, or annually. This extra cash is a delight to investors, as it is essentially a "thank-you" for being a loyal shareholder. However, this cash can and should be used to purchase more shares of the same company, if you believe in it. In turn, this will lead to more cash in your pocket when future dividends arrive. For information on why you should reinvest your dividends, see my other entry "Why Should I Reinvest My Dividends?"
Secondly, a dividend can help boost your returns when the stock price is appreciating, but also mitigate your losses when the market goes down. For example, if a stock prices rises from $100 to $110 in one year, it increased 10%. However, if you include your 3% payout, you have an adjusted 13% return. If the price decreases 10% in a year, your dividend reduces that loss to 7%.
Finally, and most importantly, a dividend is proof that a company is prosperous financially. These companies have enough capital to continue growing, and make shareholders happy. Also, the companies that are able to consistently raise their dividend payout each year, have been some of the best performing stocks in the last century. There is a select group known as the "Dividend Aristocrats" which are the companies that have raised there dividend payout for 25 consecutive years. I advise you to search for the members of this group, and seriously consider investing in them if you wish to build life-long wealth.
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