In your reading this article then congratulations are properly in order. You’ve worked really hard, saved your money and reached the point where you want to invest your money. You might even know a little about dividend investing but you still have questions.
What exactly is dividend investing?
How is a dividend growth investing different from every other investment strategy?
Well this article is great introduction to dividend investing and shows you the power dividend through patient long term investing.
You’ve probably all heard the expression “buy low and sell high”. Well if you ask me that puts a lot of pressure on most everyday investors. How do I know the know the difference between a cheap stock and bad stock? If I’m lucky enough to buy a stock that rises when should I sell my position? Not only does investing take a lot of knowledge and luck but it also takes a huge amount of time and effort. On the other hand, a dividend investing strategy can be explained as “buy and wait for the checks to roll in”. That’s right, once I buy a stock I’m expecting to hold it for at least 5 years and most of my stocks I NEVER plan on selling.
Wait a minute how can you make any money if you never sell the stock? I’m more interested in the constant and hopefully growing stream of money that I will receive from the dividend stream of the stock.
As most people who have ever invested in the stock market know stock prices fluctuate. Sometimes they will even fluctuate wildly. In a exceptional year even a blue chip stock that is an industry leader can easily swing 50 or more percent. This volatility has the potential to generate massive wealth to the stockholders provided they are able to time the ebb and flow of the market. However the trouble with this approach is that it puts all of the burden of generate wealth onto the investor.
Unlike most investing strategies, dividend growth investing is looking at stocks over the VERY long term. Let’s take Fortis Inc. as an example. I’m using Fortis as an example not because it is an incredible stock. In fact in most ways Fortis is a very boring stock. The company is primarily a utility holding company. There is nothing very interesting about paying your electrical bill every month. You won’t get rich over night owning this stock but don’t be too quick to ignore the company either. Fortis operates electrical utilities in five different Canadian provinces along three different Caribbean countries. The reason Fortis is such an interesting company is that they have a long history of paying their shareholders cash dividends as well as increasing that dividend year after year. Let’s take a look at the dividend history:
As you can see from the chart above in Fortis has raised their dividend every year since 1973. In 1987 the price on Fortis stock closed at $4.75 but the company also paid out a cash dividend of $0.313 or 6.5%. This constant and long term growing income stream is what dividend growth investors are looking in a company.
Over the long term history has shown that stocks can counted on for about an 8% annual return. That being said on any given stock there will be year’s the stock performance will be much higher then average 8% return and there will be years that the stock’s performance will be much worse. The beautiful thing about the dividend stream is that unless the company cuts its dividend (a clear sign that the company is not healthy) the stock holder can count on the dividend income regardless of the stock performance.
Let’s take a look at the 5 year stock chart for Fortis compared to the S&P 500.
As you can see from the above graph that the Fortis stock price did very well over the last 5 years. However, more importantly you can see that there were fairly significant fluctuation in the Fortis stock price over the last 5 years. The beautiful thing about thing about dividend growth investing, and the difference between all other forms of investing in that the dividend investor isn’t too concerned about the stock price because over a long enough time frame it is expected that most stocks will return close to the expected 8% annual return. However in addition to the stock gains the investors gets to sit bad and collect dividends while he waits. For our Fortis example that means an additional $5.14 that he collected since 2007 which works out to approximately 18% of the price that he paid for that stock in 2007.
Hopefully, this article helped demonstrate why dividend investing can be such a powerful tool. I’d love to hear your comments; Why do you invest in dividend producing stocks?