This article explains why investing in dividend stocks is a good idea.
If you are a long-term investor in the stock market then owning stocks that pay dividends constantly should always be part of your portfolio. For shorter term speculative investors dividend payments is not an important factor in their decision-making as all they are after is cashing out on the value created when the share prices increases.
This off course is what makes dividend investing a very integral part of every long term investor’s plans. Off course, long term investing does come with its own risk which is why you must own stocks that have proven records of delivering strong profitability growth and have a great competitive edge over its competitors. That provides you with a margin of safety or a hedge for your long term portfolio and gives you the grounds to enjoy the benefits of dividend investing some of which we will discuss.
Constant Returns – Dividends are one of the very few ways of earning a constant stream of income. With dividend paying stocks you can be very sure of earning a nice return on your investment periodically. As companies grow over the years your dividend is bound to increase accordingly, thus providing a good source of value creation. For example a single purchase of shares in a business can be repaid via a combination of cash and bonus dividends overtime.
Dividend Reinvestment – With the advent and growing popularity of e-dividends it is now easy for investors to reinvest their dividends and get the benefits of compounding interest. E-dividends ensures your dividend is paid directly into your bank account following which you can now mandate your bank to transfer to your stockbroker account for reinvestment in good quality stocks.
Dividends are periodical – Dividends are periodical in nature therefore giving you the ability to plan ahead for their payment. Companies typically pay dividends once or twice a year which typically falls about the same period every year. In fact for companies that pay once a year, dividends are usually paid between March and June assuming their accounting year is the same as the calendar year.
Dividend yields continues to grow – Dividend yields are basically the amount of dividend (paid in cash) you get divided by the price at which you bought the shares. Part of the characteristics of long-term value investors is that they buy stocks that have a low P.E ratio but with an upside that can guaranty higher profits. For example if you buy a stock for N10 per share that paid dividend of 50kobo per share today your dividend yield will be 5%. Now one would expect a good income growth stock to increase its profits and dividend over the years. If in 5 years the company doubles its dividend N1 per share your dividend yield is now 10% even though the share price may now be higher than the N10 you bought it for. This is because you bought it years back and didn’t sell, so your price of N10 is fixed and as such any increase in dividend payment down the years amounts to a higher yield for you.
No extra fees or charges – Dividends unlike other forms of investing does not warrant you pay any fees when you earn them. The dividend is processed by the registrar and company at no cost to you and paid to you without any charges. The same goes for script dividends as you simply just receive your bonus shares without any charges or even tax.
No need to wait long to earn dividends – Investors in stocks need not wait too long to earn dividends. You can earn dividends in any stock so as long as your name is included in the register of members that fall before the marked down date.
You can earn dividends even if you don’t own the stock – Dividend are typically paid to people whose name appear on the register of shareholders on the marked down date. Based on this, you can still be paid dividends even if you do not own the stock. You can buy a stock a week to its marked down date, sell immediately after the marked down date and still earn dividends from the stock. Most speculators specialize in this sort of investment style and tend to time the stocks based on its potential to pay dividends.
Dividends are yours forever – When you earn dividends in a company it remains yours even if you do not claim it immediately or in several years to come. The only problem is that it may be eroded by inflation as the value reduces as the years go by. Unclaimed dividends are never owned by the companies who declare them and are now separated from their assets. Therefore, even when the company goes bust it doesn’t affect your dividend payment. Also, even if it takes you years to verify or regularize your dividend warrants, the dividend will still be paid to you regardless of the timeframe because you have earned it.
Hedge against inflation – Good paying dividend with great yields can be a very good hedge against inflation. In an era where savings deposit rates are very low, earning dividends that pay yields higher than inflation basically guaranties a real positive return on your investment.
This article originally appeared on Nairametrics on May 9, 2014. It has been updated with new information.