Home Dividend Companies 3 Reasons Why You Should Buy Dividend Stocks

3 Reasons Why You Should Buy Dividend Stocks

There are myriad reasons why people invest in stocks.

Some do it for capital appreciation.

Others prefer to see a stream of dividend income that can supplement their income.

With “growth” being the buzzword during this COVID-19 pandemic, the idea of investing for income has fallen by the wayside as the focus has shifted from dividend investing to growth investing.

But I believe dividends still retain a certain charm which makes them attractive.

The idea of just relaxing at home or by the sea while a steady stream of cash is deposited into your bank account is always appealing.

Here are three compelling reasons why you should include dividend stocks within your investment portfolio.

Regular, passive income

The problem with owning a portfolio of growth stocks is that they do not provide a source of cash flow.

That is because most high-growth stocks reinvest their earnings to grow their businesses further.

While some may undertake regular share buy-backs, few are willing to pay out a dividend.

Investors may enjoy seeing share prices rise as growth companies head to the stratosphere, but a more pressing need exists for those who are retired or plan to retire.

This need is for a stream of cash flow to assist us with daily expenses and necessities.

If your portfolio contains only growth stocks, you will have to sell a portion of your portfolio to generate cash.

And selling may not always be done at an opportune time.

What if there is a punishing bear market at the time when you need cash urgently?

You would be forced to sell off some of your stocks at bargain-basement valuations.

To add to that, selling off a portion of your portfolio means you will have a lower investment portfolio base to continue compounding.

With dividend stocks, you can continue to hold on to your portfolio and enjoy a stream of cash without having to sell.

There is the added benefit of being able to enjoy rising levels of cash flow if the companies within your portfolio increase their dividends over time.

The flexibility of cash inflow

Receiving cash gives you the option to decide how you would want to use it.

One method is to reinvest the dividends to buy the same dividend stocks that you already own.

This move can help to bump up your ownership in these businesses over time and increases the passive income generated.

An alternative is to channel the money to buy growth stocks that may offer the promise of higher returns.

By doing so, you will not have to dip into your cash stash if you funnel your dividends either growth or income stocks.

A third option is to use the stream of dividends for daily expenses while leaving the portfolio intact.

You have the freedom to do what you wish with the cash you receive, and that’s what makes a dividend portfolio so enticing.

Implied stability and resilience

Businesses that pay regular dividends are usually flush with excess cash and have a history of consistent free cash flow generation.

These are attributes that will stand them in good stead should a sudden downturn occur.

An example would be the current COVID-19 pandemic.

Companies that have boatloads of cash are better placed to survive the harsh conditions.

These companies can also continue to pay out dividends, albeit at a reduced rate.

In contrast, certain growth companies may stumble and falter when a crisis hits due to plunging demand for goods and services.

These companies may be trading at unjustifiably high valuations and have a business model that cannot withstand major shocks.

Share prices of such companies may then tumble sharply in the wake of poorer sentiment amid a downward adjustment in the level of revenue and profit.

Dividend-paying companies have historically been able to hold their value better as investors prop up their share prices due to the ability to continue receiving dividends.

There are two benefits to this: your portfolio’s value will fall less, thus preserving the bulk of your capital; and you still get to enjoy some level of passive income.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.