Why Invest in Dividend Paying Stocks?

So why does investing in dividend paying stocks make sense?  As my old college statistics professor used to say, look at the data, John, the data…

What I find interesting is that when I started my career on Wall Street in 1990, no one really cared for dividends.  Goldman Sachs’ three mutual funds at that time where Capital Growth, Small Cap and Select Equity.  None of the three prioritized investing in dividend payers.  Remember, this was in the age leading up to the internet bubble of 2000.  Everyone wanted to grow their wealth via stock price appreciation.  Well, as I’ve pointed out elsewhere in this website, the investor is trusting management a lot with their money for these types of companies.  And, as the data shows, with losing results.

A well-known and respected investment & research firm, Ned Davis Research, conducted a study several years ago that will blow your mind.  They compared the returns of all stocks in the S&P 500 from 1972 to 2004.  Their study segregated the S&P 500 stocks into buckets, based on the dividend policy of the company.  The results?

  • Non dividend paying companies returned 4.3% per year during this period.
  • Companies that were reducing their dividends and/or eliminated the dividends returned 5.2% per year
  • Companies paying a constant dividend returned 7.3% per year
  • Companies that not only paid a dividend but often increased the dividend returned 10.6% per year

The data has spoken.  I would suggest the intelligent investor follow the path that the data supports.

In the Best Dividend Stocks Top Tips, I will only include stocks from this last grouping.  We want to invest a vast majority of our long-term capital into companies that are growing their dividends.  The data supports this approach. 

In the Higher Growth Dividend Stocks my intention is to seek out companies that are in the early stages of increasing dividends by a huge percentage basis.  Investing in them now, hopefully, will produce similar results to when Warren Buffett first bought into Coca-Cola in 1988.  Since that time, Coca-Cola has raised its dividends 1,300%.  One doesn’t need to invest huge amounts of money to make great returns….if you can manage to catch the next Coca-Cola at the right time.  This will be the intention / concept of the Higher Growth Dividend Stocks.

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