Here's What You Should Know about Growth & Income Stocks
So is there a great secret to dividend stock investing? Everyone understands that investing in great companies is made even better when those companies have a consistent policy of sharing earnings with shareholders through increasing dividend payouts. Once you consider this often misunderstood secret, it becomes one more reason why you should be buying dividend blue chip stocks now.
WHAT IS A DIVIDEND and WHAT'S THE GREAT SECRET?
A dividend payment from a stock you hold is essentially that company sharing its earnings or profits with its owners, among them -- you as a shareholder. If you also choose to invest in stable companies that have a growth component based on their field, industry, or are in the midst of great innovation, or merger, your reward will also be the increase in the underlying value of the stock. These gains are what most investor focus on entirely, but it the total return of both growth and income that makes an investment a long-term winner.
So now to the best-kept secret of finance! The great secret of dividend stocks is that eventually over time you will get ALL of your money back! It’s that simple, and also just that amazing. If you hold the stock long enough - a company that has dividend stabilty, it will pay you back all of your money! You make an initial investment, and even if the stock price never appreciates, the quarterly dividends will, in time, return all of your money.
Let’s look at this 100-percent pay back with an sample XYZ stock. For example, let’s start by considering one share of XYZ stock that costs $30.00, that pays a quarterly dividend of 29 cents. If you hold this share of XYZ long enough, eventually you will recoup all of your initial investment - so we want to calculate how long it will take. Without any change in the value of the underlying XYZ stock, your dividends would return the original cost in under 104 quarters [$ 30.00/.29= 103.45 dividend payments], or just over 25 years. If you reinvest your dividends for partial shares, this ‘recovery time’ of your initial capital reduces as your dividends also begin to generate dividends.
Of course twenty-five years is a long time, but in your working lifetime it can also be a great way to build wealth. Imagine making this purchase mid-career, and the return is available right when you retire. Or imagine that a dividend stock as a gift for a new-born can help generate funds as a down-payment for their first home, or a wedding, or graduate school in their twenties. Even a gift to a teenager could make funds available for their family needs mid-career, or set them on a path of saving that ensures their solid retirement.
One factor to keep in mind here is the impact of transaction costs. Unless you invest with a discount online broker or directly through a DRIP or DSPP, investors should be very watchful of transaction fees. It often makes sense to delay purchases until some small threshold of funds has been accumulated so that the purchase fees represent a small enough percentage of the underlying transaction. If you pay $1 to buy shares, it’s alright to invest a small amount like $75 or $100; but if your fees are $7.50 to $9.99, then it is probably better to delay your purchase until you have at least $500 or more.
Dividend stock investing is a great way to accumulate long-term positions in quality companies. There are lists available online of a number of companies which have paid consistent dividends for decades or more. In addition, there are resources which help you to identify those companies which have also consistently increased their dividend payouts over time. Solid, relatively conservative companies which maintain reasonable dividend payout ratios could also be sending the signal that they are leaving room for modest dividend increases over time. This will also speed up your pay back and accumulation!
One word of caution: never choose a company solely based on its underlying dividend yield. It should be a solid company to own without its return of profits in the form of dividends. There are many reasons for a dividend yield to be very high, but the principal one is falling stock price. Be careful.
Be sure to consult your tax and financial advisors, and other investment professionals before you commit any risk capital to stock investing. Now that you are empowered by the secret of dividend stock investing, you may be asking yourself: “how do I find the best blue chip dividend stocks?” -- well, begin doing all the research you possibly can on the company, read its annual report, and understand the entire business. That’s a great place to start!