I have been a dividend, income seeking investor for quite some time. I can assure all of the newbies, beginners, and observers reading this, that after many different strategies I have personally tried, using this path has proven to be the most successful. The most consistent. The most secure with minimized risks, of all of the paths I have written about.
Benefits Of Dividend Growth Investing
There are many paths for new investors to choose from, however, a core portfolio of dividend paying stocks makes the most sense for long term investors.
- Holding stocks for the long term (20 years or longer) tends to smooth out the bumps along the road both high and low
The market has volatility. Sometimes there is more than other times, especially during periods of uncertainty as we have seen for the last 10 years or so. When an investor is laser focused on investing in stocks that pay you to hold them, you will always have something to show for those positions. Even if the stocks drop.
- Since the focus is on income, there is less concern about share price fluctuations.
Every investor on the planet wishes they owned the highest flying stocks at the lowest prices and sold out at the top. All of my life I have heard stories about company XYZ that went public at pennies and now has a share price of 10,000 times that; "I should have bought a million shares of that one". We have all heard it, all said it, and all dreamed of it.
There are many folks who have actually done it but they are the exception. For most people, it is nothing more than wishful thinking akin to winning the Powerball Lottery.
As a matter of fact, most of us have trouble even following the most basic strategy of buying low and selling high. Maybe it is a human flaw, maybe it is greed, maybe it is just a lack of knowledge on when to buy and when to sell.
Whatever the reason might be, most investors fail, and they either blame the system or feel that the "game" is rigged.
- Less worrying about the past, the present and the future
There are plenty of stock market pros and experts around who think that a solid portfolio of dividend paying large cap blue chip stocks is naive. Those pros all claim to have a handle on the next day, week, month, quarter and years move of any stock that is around.
Perhaps they want to sell you their newsletter, or books, or their monthly publication on the next 10 high flyers. To me it is a fool's game for the long term investor. Today's high flyer can make you broke in the future, and the past is irrelevant. Why worry about the future, get frustrated with the present and ruminate over the past?
- More peace of mind and less risk
As dividend growth investors know, they CAN feel more secure knowing that they can count on a regular stream of income from their investments. Whether they re-invest those dividends or take them as cash, they have tangible assets to show for their investments.
The stock could move up or down or sideways. Every month, or quarter, or year, the dividend growth investor will be "cashing checks" as long as the companies keep paying those sweet dividends.
- Have your cake and eat it too
Often, those very same dividend stocks can somehow make dramatic gains in their share prices. Adding those gains can give investors a total return (dividends plus capital appreciation) that might far out pace the market indexes and create wealth within the very same portfolio.
A wonderful example is the value of a $100,000 portfolio from 12/31/1999 invested in the S&P 500 versus the value of a $100,000 portfolio invested in the Dow Jones Select Dividend Index* through late 2010.
S&P 500 Index (SPY) value as of 9/1/2010: $86,713
Dow Jones Select Dividend Index (DVY) value as of 9/1/2012: $193,293
Not only did it outpace the S&P, but the value of the portfolio nearly doubled in the 10 years just by investing in that index. Here is a link from Ameriprise for you to browse through with some very good information.
SPY has a dividend yield of 1.98% and DVY has a dividend yield of 3.70%. We can do a much better job of diversifying and managing our portfolio by selecting the stocks we want to own, to monitor, to add to, to sell, and have a far greater return than either of these investments. However, this should tell you a bit more about how successful and time tested this investment strategy happens to be, even in an ETF, mutual fund, or an index fund.
We can manage the portfolios ourselves, with our needs in mind, not a fund or index or portfolio managers needs in mind.
- Have a more secure retirement than with any annuity insurance product.
There is a place for annuities and many folks have sworn by them for longer than I have been alive. Those folks simply do not want to be bothered, have no idea where to begin, nor care, and they want to know exactly how much they will get every month for the rest of their lives.
While there are many variations to these insurance products, the plain vanilla one which pays a fixed amount every month for a lifetime is the most popular. There are no increases in the monthly payments. They do not keep up with inflation. There is ZERO growth, and you hand over a huge chunk of your own money to the insurance company forever. You no longer have control of anything except the amount of money the insurance company gives you back every month.
The fees paid to the insurance company, in the form of commissions and administration costs, pales in comparison to the amount you can actually earn from the money you handed over to them, to give back to you in little pieces with a tiny tweak. Guess what the insurance companies are doing with your money? INVESTING.
There are many other "extras" that can be added to the plain vanilla fixed annuity. You will either pay for them or get even less money monthly for each "extra" you add. The bottom line is obviously there are millions of folks who love these insurance products. Just not us.
This Is The Path We Will Take
As I have stated in previous articles, the dividend growth investing path is the road we will travel here within my articles on Seeking Alpha. I have outlined many of the advantages here and our readers can probably add tons more in the comments to follow.
Since this is the investing path that has worked for me, our family, friends and readers right here, there is absolutely no reason for us not to continue trying to educate the newer investors, younger investors and beginners with longer time horizons in the BEST path to "Enjoyment Without Employment". In the next segment we will build a portfolio that I personally believe would be beneficial for any investor, especially the beginners with longer time horizons.
Please check out my other chapters 1-9 in this series; A List Of Articles For The Beginner right here.
I sell nothing, I do not seek clients, and I have no other subscription based products to sell anyone. My suggestions are free, and many would say that is about all they are worth. I love doing this and just hope you all will continue reading my articles and perhaps help others with the knowledge YOU have gained.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.