The Advantages of Purchasing Dividend Stocks

A common strategy for most income orientated investors is to purchase dividend stocks. During the last few years, this kind of approach is helping to increase the overall returns in a portfolio. A good example of this can be seen by looking at the performance of dividend stocks in comparison with growth stocks. In 2011, the average return for growth stocks was 1.5%. While, the median return for dividend stocks during this time was 7.1%. This is showing how these kinds of stocks can provide a portfolio with advantages that are not available in other areas of investing. To see the full benefits of buying dividend stocks requires looking at these advantages and how they are helping investors.

The Benefits of Dividend Stocks

There are number of benefits of investing dividend stocks. A few of the most notable include: steady income, better performance and the ability to stay head of inflation. When it comes to producing steady income, dividend stocks can provide investors with yields that are considerably higher in comparison other income orientated areas (such as: bonds, certificates of deposit and savings accounts). For example, Verizon is currently yielding 5.40%. This is higher than the national average yield on savings accounts of .65%. Those investors who buy and hold companies that are paying strong dividends will realize higher levels of income.

Another advantage of purchasing dividends stocks is they have better performance. Using the previous example of Verizon, investors realized a 17.22% total return during the last year. This is taking into account the dividends received and the amounts of growth realized. These results are better than the performance of the Dow Jones Industrial Average of 5.3%. Anyone who owned Verizon during this time realized a 228% increase in comparison with the indices. This is significant, in showing how purchasing dividends stocks can dramatically increase the total returns in a portfolio.

The combination of the dividends received and growth helps the portfolio to see consistent increases in value. This protects against inflation by offering a much greater return in comparison with wholesale and retail prices. During the last ten years these amount have ranged from 1.6% to 4.1%. Anyone who purchases those companies that have a consistent track record of paying dividends will be able to stay ahead of inflation. For example, Pfizer is known for paying consistent dividends going back to 1982. At the same time, they have the ability to provide consistent growth. In 2011, the total return was 19.90% (which is taking into account the dividends and growth). This is much higher in comparison with the inflation rate of 3.0%. Anyone who purchased Pfizer at the beginning of year was able to stay ahead of rising prices by 563%. This protected their portfolios against sudden shifts in the markets on concerns about the economy.

Clearly, purchasing dividends stock can provide investors with higher returns, more stability and it can mitigate any issues from inflation. During times when the economy and markets are facing a number of challenges is when this strategy has become increasingly popular. As a result, those investors who want income and steady growth are using this as a way to increase their overall returns.

 

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  • Great article. Income investments are so important to a diversified strategy. The 2011 Barclays Equity Gilt Study gives an interesting example; an investment of just £100 made at the end of the Second World War would be worth only £5,721 today, without adjusting for inflation. However, if the income received throughout the term of the investment has been re-invested, that £100 would have been worth a phenomenal £92,460 by the end of 2008.

  • Siya Technocrat

    I like to
    share two major mistakes make by a dividend investors. First is not buying
    dividend stocks in tax-efficient wrapper. Second is falling to reinvest
    dividend income systematically.
     

    australian dividends

  • Siya Technocrat

    Dividends are the money a company
    makes, paid back to its shareholders. Some investors love dividends, and some
    don’t like dividends at all. Dividends should be something you consider, but
    you should also make up your own mind based on your own goals.
     

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