Dividend investing may not sound like the most exciting way to accumulate a million dollars.
Recently, growth companies and meme stocks have captured the imagination of new investors as a way to make a quick buck..
However, the reality is that dividend stocks with growing income pay outs could generate impressive total returns in the long run.
As such, they could be worth buying and holding over an extended time period.
Assessing the fundamental strength of a company is always necessary before making an investment.
Dividends provide some indication of the financial standing of a business, as well as how it could perform in future.
For example, a company which is expected to increase dividends at a fast pace may be in a relatively strong financial position.
Its management team could be anticipating a rise in profitability over the medium term, which can justify high dividend growth.
For example, Tractor Supply Company (NASDAQ: TSCO) had hiked its quarterly dividend from US$0.35 to US$0.52 based on more optimistic projections on sales and profitability.
In contrast, if a company is struggling to generate sufficient cash to maintain its dividend, it may signal that its financial outlook is set to disappoint.
Although the vast majority of investors may not require the income stream which dividends provide, they could still make a significant impact on total returns.
The reinvestment of dividends has consistently been shown to make up a significant part of an investor’s total returns over his lifetime.
Therefore, ruling out dividend-paying businesses simply because their income potential seems to be unappealing could be a flawed decision.
Furthermore, dividend stocks are generally popular among investors.
If a company is able to grow its dividends quickly, it could attract the following of a large number of investors.
Their interest in buying the stock may help to push its share price markedly higher, and could lead to it outperforming its industry or index.
While not all dividend stocks have defensive characteristics, many of them are not intricately tied to the wider economy as compared to cyclical companies such as oil and gas, for instance.
Therefore, they may be able to offer a degree of resilience during challenging economic periods.
A stable share price can then reduce an investor’s portfolio volatility and create more stable returns over the long run.
Additionally, a stock with a high dividend yield may offer a margin of safety.
During bear markets where significant share price declines are seen, all things being equal, dividend yields will usually increase assuming the dividend paid remains constant.
Therefore, monitoring the historical dividend yield of a basket of stocks could provide an investor with guidance on whether it is an opportune moment to buy them.
Adding stocks when their yields are high enables the investor to take advantage of weak sentiment to increase his stake in strong dividend-paying companies while also increasing his overall portfolio’s dividend yield.
Get Smart: Slow and steady wins the race
While dividend stocks may appear to appeal only to income-seeking investors, what you may not realise is that they may also possess decent growth prospects.
As such, their appeal could extend to a larger variety of investors.
By buying high-yielding stocks with dividend growth potential over years, you will be on your way to becoming a retirement millionaire.
It’s Fight Night on 29 July…and you’re invited! Crowd favourites, Keppel DC REIT (SGX: AJBU), Frasers Logistics & Commercial Trust (SGX: BUOU), and DBS (SGX: D05) will fight to the end for the title of “Champion of Dividends.” Be the first to find out who wins in this 3-way mayhem on the 29 July. We’ll host a webinar, and together we’ll analyse each contender’s strengths, weaknesses, and potential. To reserve a front-row ticket to this royal rumble, click HERE now.
Disclaimer: Royston Yang owns shares of Tractor Supply Company.