Investing in stocks can be like buying a lottery ticket. You can have a very good reason to believe that a stock is going to rise. But ultimately, it amounts to speculation.
Investing in dividend stocks is more than speculation. It’s a good way to build long-term wealth.
Dividend stocks aren’t solely dependent on their share price rising or falling. When you buy a dividend stock, you know for sure that you’ll receive a steady stream of income—generally on a quarterly basis. If the market crashes and the share price begins to fall, you at least have a nice 3% or 4% yield (or higher) to soften the blow.
More often than not, you can trust a company that pays a dividend. Dividends are a measure of a company’s success and its commitment to shareholders. The companies that consistently grow their dividends are the ones whose sales and earnings are also growing. Companies that lose money or fail to grow are unable to consistently pay a dividend.
When a company pays a dividend—and especially if it makes an effort to increase that dividend every year—it shows that it cares about rewarding shareholders. Paying a dividend is also a savvy way to attract investors, which is why their share prices typically appreciate over time.
Dividend stocks aren’t going to make you rich overnight. But they can significantly build up your nest egg if you buy and hold them for years, or even decades.
Not all dividend payers build wealth. You need to search for investments with timelessness and longevity—companies that are sure to not only be around 20 or 30 years from now, but still thriving. Dividend stocks become more powerful, and usually make up a larger part of your annual return, the longer you hold on to them.
For example, if you had bought Wal-Mart (WMT) in April 1990, your current yield on cost would be about 19%. That means you’d be collecting 19% of the value of your original investment every year from dividends alone. If you’d invested $10,000, you’d now be collecting $1,921 in dividend payments every year.
With investments like these, it’s best to let your money work for you as long as possible.
That can mean riding out some tough times. Wal-Mart declined 23% during the 2000 bear market, for example. Selling would have saved you some money in the short term, but you also would have forfeited that 19% annual yield.
When buying dividend payers, you have two options. You can either collect the quarterly income or reinvest it to buy more shares. The latter is called a dividend reinvestment, and is an easy way to increase the value of your position without having to do much. You can always start collecting the dividends down the road when you need the income.
To help you find the best dividend stocks, we offer Cabot Dividend Investor, a service that has generated a back-tested 328% total return and a 14.1% yield since 2009.
Each write-up features commentary on the picks from one or more of our expert stock market analysts, as well as company details and a stock chart.