Healthy investor-friendly corporations that earn a profit pay out a percentage of their earnings to their shareholders as dividends thus ensuring a source of continuous passive income stream for them. Due to the recent financial crisis, many people are tired of the risks, therefore they choose more conservative investments like bonds and treasuries. Stocks still offer a good opportunity for passive income.
Investing in dividend stocks is a long-term strategy. Dividend-paying stocks provide a recurring stream of income, and they also have room for growth. Dividends tend to increase over time and keep up with inflation. Diversified portfolios of these stocks usually outperform stocks that do not pay dividends. Certainly, the results vary from year to year.
Although we have experienced a dividend depression in the financial sector recently, dividends have risen in other sectors of the economy. Some of the dividend-paying corporations reduced their distributions during the recession, therefore those who want to mitigate risk should choose a diversified mutual fund. In any case, it is a good idea to invest part of your portfolio in dividend stocks.
If you want to set aside funds for your retirement, you should save a certain amount of money every month and buy dividend-paying stocks that are attractively priced at the time. You should also reinvest the dividends received. Reinvesting payouts is a great long term strategy. Using the dividends to purchase additional shares utilizes the power of compounding through reinvesting a consistently increasing payout. Thus an increasing number of shares pay dividends during the next payout. This long-term strategy will result in huge earnings over time.
The best way to make long term investments in the stock market is to purchase stable companies that pay an increasing dividend. So that you have a properly diversified portfolio, which will withstand financial crises, you should hold shares of several companies that represent different market sectors. However, market risk cannot be diversified away, risk can be mitigated through buying only first-rate businesses. If a company regularly pays a dividend to its investors, and the stock prices fall due to unfavorable market circumstances, the dividend can prevent the price of this particular stock from dropping too far, in case the the company does not significantly reduce the dividend payout. When the stock price drops, the dividend yield increases, which attracts investors who appreciate the larger payout per share. Therefore dividend-paying stocks have an artificial price floor, they are a good bet in a difficult market that seems more volatile every day. When the market is volatile, regular income can be calming.
Frequent buying and selling of stocks certainly increases expenses, thus lowers returns. Holding quality dividend stocks protects your dividend streams and helps ensure steady share price appreciation. When choosing stocks, you should examine whether the company would be able to increase its earnings in the future. Without growing earnings, no company can increase dividends for a long time.
Finding high-dividend stocks for which the dividend is going to stay high has become a challenge recently. The S&P comes out with the list of "S&P 500 Dividend Aristocrats" every year . The list contains the best dividend-paying companies that meet the following requirements:
Minimum market capitalization of $3 billion.
Minimum average trading volume of $5 million.
Increased dividends every year for at least 25 years.
Companies that were able to meet these requirements have sustained their cash flow and withstood downturns. The following companies have demonstrated the ability to grow their dividends above inflation: Archer-Daniels-Midland, Lowe's, Aflac, Becton, Dickinson & Co., ExxonMobil. The growing dividend is an indication of a corporation’s increasing intrinsic value. These companies have long track records of returning cash to shareholders, and increase the value of an investment portfolio as well. Companies that increase dividends tend to have rising share prices over time.
Paying out dividends indicates a corporate structure that favors investors. Dividend-paying corporations are also considered less risky and offer some fraud protection as a company cannot pay out profits that only exists on paper.