Why Is Dividend Investing So Popular?

|
Includes: DGRO, DGRW, DIVC, JTD, LEAD, NOBL, PFM, RDVY, REGL, SDY, VIG
by: The Dividend Guy

Have you ever wondered why investing in boring companies offering boring returns is so successful?

Let's face it, dividend growth investing is far from being sexy. I'm pretty sure you have encountered plenty of investors or traders offering better options. Some will trade penny stocks and transform $100 into $10,000 within a week. Some others will use technical analysis to determine when is the perfect moment to enter a new position and always get out before the market crashes. Then, you wonder why a bunch of geeks would waste precious hours to go through financial statements and look at many ratios and metrics in order to find a strong dividend paying company. This article is for those who don't understand why we prefer boring stocks with boring returns over other strategies.

Dividend Investing Effectiveness has Been Proven Many Times

While many gurus are trying to convince you that they have found a new way to make money with investments, dividend investing tenants have proven its effectiveness many times. The strongest dividend growing stocks are also offering the best returns:

You can also look back at the past 30+ years and get the same results:

In other words, dividend growth stocks outperform the market. This is not an opinion, it's a fact. By choosing dividend investing, you choose an investment strategy that works. The key is to select dividend growing companies and not simply dividend payers. As you can see, dividend paying stocks do well, but companies who are able to increase their payouts year after year are doing a lot better. This makes sense as a company that is able to increase its dividend payments has to be a company that increases its revenues and earnings. Then, it's a company showing a stock going up!

Dividend Investing Doesn't Require Some Magical Methods

What I dislike about many other investing strategies is the fact they require either a program or special methods that identify some kind of loophole in the stock market. Do you really think these methods work? I mean, there is a guy whose methods work very well and has decided to share with the world. To this day, you can still participate in his "magical way of making profits" and his name is Warren Buffett. I'm wondering if I ever crossed the name of another successful investor using a technique coming from momentum or penny stocks trading. While Warren Buffett is not solely a dividend investor, he still shows a preference for companies sharing several qualities with dividend growers.

It's not that the other strategies don't work. It's just that they are often very complicated or requires you use programs and techniques based on complex calculations (that don't always work anyways). On the opposite hand, if you have a set of simple investing rules, you can build a solid portfolio with dividend stocks.

Dividend Investing is the Only Strategy Paying You No Matter What

I guess this is similar to many dividend investors, but the thing I like the most about dividend investing is getting paid each month no matter what is happening in the market. During the first 6 months of 2016, the market was up and down, my portfolio was sometimes showing positive, sometimes negatives results, but my cash balance kept increasing month after month. I didn't have to worry about the quality of my holdings as each company I own shares of made sure to remind me why I picked them in the first place: my companies kept increasing the payouts during the up and down times of the market. I didn't have to do anything special to receive this income. I simply used an academically proven investing method and have stuck to it.

Dividend Investing Provides Some Astonishing Results Over Time

At the beginning of this article, I wrote that most dividend companies give the impression of being boring while delivering boring returns. This is actually a false perception. It is true that none of my holdings have come close to a skyrocketing Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX) or Tesla (NASDAQ:TSLA). However, when you look over the long haul, these companies are showing amazing results. Here are a few examples of a few of my holdings showing their returns (excluding dividend!) over the past 10 years:

Click to enlarge

Source: Ycharts

While I hold all these companies in my portfolio today, I didn't purchase them 10 years ago. But I truly wish I had! Imagine what my portfolio would look like now!

I've taken the past 10 years as you can clearly see what happens if you buy dividend growing stocks right before a market catastrophe. 10 years later, they have almost all doubled in price. If you are expecting another market crash tomorrow, they would all still show a +50% at the end of the drop. And no matter if the crash happens or not, they will all continue to pay you bigger and bigger checks each month.

Now, do you understand why dividend investing is so popular?