Want a psychological edge over the market? Go with dividend stocks.
Most of the investing masters have become so wealthy by buying and holding through thick and thin for years or decades. They have had tremendous patience and insight, and the best dividend stocks can give you an edge to help you be like them.
With non-dividend-paying companies, you only grow wealth if the share price increases. Any time spent on a down or flat trend is a waste. As any experienced investor knows, the share price could go up, go down, or stay flat for a very, very, long time. The decade from 2000 to 2010 is now being called the “lost decade”, because if you had invested money into an index fund at the turn of the millennium and held onto it for 10 years, you would have gained basically nothing. The best investors among us are capable of holding onto a stagnant stock for years knowing that it will eventually pay off due to solid company fundamentals, but precious few people have that kind of patience.
Dividends, however, give you an incentive to keep holding onto a company. Consider an example of yourself buying shares of a company, and holding onto them for the long term hoping that the company follows through with your investment thesis. It may take longer than you expect for the share price to increase, and you may be tempted to sell and look for greener pastures, but dividends will help you hold on because even if the share price stays flat, you still build your wealth by reinvesting dividends.
Accumulating more shares
One of the most disheartening things in investing is when you buy shares of a company only to see them significantly drop in price for no fundamental reason. Suddenly your share price needs to gain a lot just to break even! With dividend-paying stocks, however, you have the psychological edge to look at a drop in share price (due to reasons unrelated to company fundamentals) as a blessing! When the share price drops, the company is at a deeper value, and your reinvested dividends will be able to purchase MORE shares than they otherwise would have. When the market gets its head back on straight and values your company appropriately, you will have more shares than you would have if the share price had never dropped at all. In addition, for companies that regularly repurchase their own shares, a lower stock valuation means that they can purchase more shares for the money, and benefit you, the investor, more than they otherwise would have been able to.
So a dividend growth investor that reinvests dividends or enjoys appropriately-priced share repurchases can rejoice regardless of short-term market conditions. In fact, the longer your shares stay depressed in price, the more shares you’ll accumulate with reinvested dividends and repurchases. That’s one awesome edge- confidence either way.
Thoughts? Let me know with a comment.