Many investors approach the stock market with the intention of building wealth quickly. As a result, they often focus on popular growth stocks and ignore less exciting dividend stocks.
Investing in dividend-paying companies, however, could be an interesting proposition, if suited to your investment acumen. Let’s take a look at what dividends are and the possible benefits they could offer to investors.
A share of company profits
A dividend is a portion of a company’s profits that is paid out, in cash or shares, to the shareholders of the company. While fast-growing companies sometimes choose to reinvest their profits in pursuit of further growth, more established, mature companies could be inclined to pay a proportion of their profits to shareholders, through regular dividend payments.
Dividend stocks as a long-term return driver
From an investing point of view, dividend payments may seem insignificant in the short term. However, over the long term, dividends have been shown to make up a considerable proportion of total investment returns from the stock market.
For example, according to Bloomberg, for the 10-year period to the end of 2016, the FTSE 100 index returned just under 15% when dividends were not included in the calculation. In contrast, with reinvested dividends included in the performance of the index over that period, the total return was 67%. That’s a significant difference.
Past performance is not a guide to future performance.
Generate passive income
Another key benefit of dividends is that they can offer a way of building a passive income stream. With a number of stocks in the FTSE 100 index currently yielding over 4%, a dividend investor has the ability to construct a portfolio that could generate a sizeable income stream.
Furthermore, regular cash dividend payments can also provide the investor with the opportunity to put the power of ‘compounding’ to work. Compounding is the process of generating earnings on previous reinvested earnings, and over time, can result in the growth of an investor’s portfolio. By reinvesting dividends, there is a possibility that more dividends can be generated for the future.
The value of investments and the income derived from them may go down as well as up.
Higher protection during market volatility
Lastly, dividend stocks often tend to fall less than growth stocks during periods of market volatility. Companies that pay dividends are generally well-established firms with strong track records. As such, investors often gravitate towards these companies during volatile periods.
Have you considered adding dividend stocks to your investment portfolio? Get in touch with us today and talk to an independent financial adviser, who will be able to offer the guidance needed to make the right decision for you.
The content of this article is for generic information. You should seek professional advice prior to the inclusion of dividend-paying stocks in your portfolios.