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Summary

  • Dividend growth investing has proven over and over to be an effective wealth-building strategy for retirement, as well as any more secure financial future.
  • I believe that investors who choose a strategy of picking stocks that could increase in value are actually gambling, not investing.
  • Are you investing to build wealth over time, or trying to strike it rich by picking a few hot stocks?

There really is no other way for me to say this, but after reading some of the most absurd articles that dividends do not matter in retirement, I am compelled to just say this flat out -- if you are not investing in the greatest companies that will keep paying you an income (and increasing it every single year) simply to hold their stock, then you are placing your money at much greater risk and are virtually betting that things will go your way.

The main question that any solid investor should ask themselves is, what you are actually investing for?

Some Basic Common Sense To Support My Position

I can probably give thousands of examples, but let me just give some of the most apparent, and hopefully in the comment stream, readers will chime in with all sorts of examples.

  • The financial industry makes the majority of its money by borrowing cheaper money and lending at higher interest rates. If they invest in securities, they invest in ones that pay them a dividend (or a rate of return). The biggest and most successful financial firms, including banks, want something for the money they invest, and that is in the form of "dividends" and payments. Why should individual investors buy securities in the hopes of any equity increasing in value? (Yes, no matter what anyone thinks, investing in a stock that pays you nothing is no more than a hope that you will make a profit.)
  • Insurance companies make money by taking your money and investing it in dividend paying stocks to insure that not only can they pay their obligations to policy holders, but also to make enormous sums of money not only from the fees they charge individuals, but from the dividends they receive from their investments.
  • Warren Buffett invests mainly in dividend paying securities of various kinds and reinvests them for himself into companies to continue making profits while using the dividends he receives to fund his own investments. Individual investors in Berkshire Hathaway (NYSE:BRK.B), can only hope, and place great faith, that Buffett can keep increasing the value of the stock. That being said, Buffett is using your money, and dividends, to fund all of it.
  • In retirement, you can invest in stocks that will pay you no more than a hope, not cash, to enable you to draw down funds to pay your bills, and you need to hope you never run out of money by the fluctuations of the stock share price itself. Or an investor can invest in the greatest companies on the planet and get paid to simply buy the stock, no matter what the share price might do on any given day. In turn, those investors will be able to use the dividends to pay the bills and still have their investment available if needed.
  • Finding the next hot stock has created some very wealthy individuals, but from my vantage point I know 10 failures for every 1 success over the long term. If an investor picks a stock that has the next best "thing" and it does not work out, the investor loses their shirt. An investor who owns small pieces of mega cap, brand name, proven companies that have matured and pay shareholders a "salary" in the form of dividends (and continually increase them year after year) will more than likely have enough money to fund a more secure financial future.
  • Reinvesting dividends right back into a stock will exponentially grow not only the total value of an investor's portfolio, but generate wealth by using dividends rather than one's own resources. Investing in stocks that pay nothing in the form of dividends requires that you pour more money out of your own pocket to add more shares and still hope you are right.

I can go on and on, but maybe I will save all of this for a book someday.

The Facts Speak For Themselves

Across the entire investment world, dividend paying stocks have always outperformed any other group or metric. As detailed by Scott Davis and Michael Brantley of Columbia Management recently:

For long-term investors, dividends provide a source of repayment on their initial investment. The more you get up front, the less you have to rely on less-predictable capital appreciation for the cash return on an investment.

(click to enlarge)

Historically, dividends have been an important component of total return. Dividends have accounted for 42% of total return on average since the 1920s. Moreover, in nearly every decade during this period, dividends represented more than 25% of total return (aside from the 1990s decade of tech advances).

(click to enlarge)

Of course we can all simply take a look at this chart from Ned Davis Research as well, and it will encapsulate just about everything I am saying:

(click to enlarge)

Analysts and researchers can spin these stories any way they want, but the bottom line is that over the long term, dividend investing beats everything, and most certainly matters in retirement, or any other stage of life.

A Simple Step To Get Started Right Now

This does not need a PhD in macroeconomics to figure out. The internet is filled with the dividend payment history of every company in existence, and there are about 50 companies that fall into the dividend aristocrat category. The dividends not only have been paid, but increased for over 25 consecutive years.

Select your own personal favorites from this list, limit the number so you can follow their earnings reports and conference calls more easily, and receive dividends for simply buying shares. I happen to like the biggest and the best of all of the ones in the category.

  • Exxon Mobil (NYSE:XOM): Over 30 consecutive years of dividend growth and payments.
  • Procter & Gamble (NYSE:PG): Nearly 60 consecutive years of dividend growth and payments.
  • Coca-Cola (NYSE:KO): Over 50 consecutive years of dividend growth and payments.
  • Johnson & Johnson (NYSE:JNJ): over 50 consecutive years of dividend growth and payments.
  • Chevron (NYSE:CVX): Nearly 30 consecutive years of dividend growth and payments.
  • AT&T (NYSE:T): Nearly 30 consecutive years of dividend growth and payments.

As of right now, there are 49 other companies on this exclusive list. Since every investor is unique and has their own preferences, I am certain you can find 10 companies that you would like a small ownership stake in, and have a fairly reasonable expectation that you will be paid a salary every year, see it increased every year, and you can never get fired, unless the company goes kaput!

By developing a portfolio consisting of dividend growth stocks and reinvesting the dividends right back into the same stocks until you need the income, you will set yourself up for a more secure financial future.

The rest is nothing more than placing bets on individual stocks hoping their share prices rise, no matter how anyone else wants to spin it.

Study after study has proven that the returns of the index without dividends amounts to a fraction of what they are with reinvested dividends factored in. Which means one thing. If you are investing in stocks on an individual basis, not in a mutual fund or an ETF, and you are not considering whether or not the stock is paying a dividend, you may just be gambling and may ultimately end up unsatisfied with your results. That's because dividends are a measure of a company's success, a company's maturity and a company's commitment to its shareholders... The purpose of a company is to increase shareholder value. Paying a dividend attracts new investors and keeps loyal investors in place. Stocks that do not pay a dividend are required to deliver better-than-expected earnings results - merely meeting expectations is not enough and may send a stock price tumbling.

This is what I consider investing. Investors who wish to count on growth of wealth and income have always and will continue to look to dividend stocks.

Do dividends matter? It is absurd to believe otherwise.

The Bottom Line

There are no free lunches, and even Exxon Mobil can go bankrupt. For my own personal financial security, I would take Exxon Mobil over Tesla (NASDAQ:TSLA) any day of the week.

But hey, that's just me.

Source: Retirement Strategy: The Absurdity Of Believing That Dividends Don't Matter In Retirement