Why Invest in High-Paying Dividend Stocks

There are many ways to invest in the stock market, and not all of them are effective. One of the best (and also one of the safest) strategies is to invest in solid companies that have steadily increased their dividends since 10, 20, 30 and for some even for more than 50 years in a row. This strategy has been successfully implemented for years in the United States by investors of all ages, whether for the purpose of obtaining additional income for retirement or for achieving financial independence.

These exceptional actions are often titled as “dividend aristocrats” or “dividend champions”. We will see in detail in this article why investing in growing dividend stocks is probably the best stock market investment strategy for a particular investor.

Rising Returns

Dividend-paying stocks offer historically higher returns than those that don’t. For proof, here is a graph illustrating the performance of these stocks between 1987 and 2015. You can see in green the “growers”, i.e. companies that have increased their dividends each year, and in dark blue the “payers”, i.e. companies that pay regular dividends (without necessarily increasing them). These two categories of stocks have a much higher performance than “Non-payers” (companies that don’t pay dividends) and “cutters” (companies that for one reason or another remove or decrease dividends paid). In terms of yield, just feel it with your open eyes.

Strong companies

A company that has increased its dividend payments regularly for a decade or more is no doubt a company that has a particular advantage in its sector. Dividends paid to shareholders are a share of the company’s profit which is redistributed. If the profit of the company does not increase, it is impossible to increase the dividend in the long term without ending in bankruptcy. Attention However, even a company has increased its dividends for 20 years, it doesn’t mean it won’t have any difficulties today and then cut it tomorrow, that is why it’s important to make a qualitative control of the company and don’t buy random dividend payers.

Reduced volatility

Companies that pay dividends generally have price fluctuations that are smaller than the others that do not pay. Below is a chart illustrating the volatility of dividend-paying equities compared to those that don’t pay. You can see in blue that the volatility is significantly lower for stocks that pay a dividend greater than zero. This is important because reduced volatility generally has a positive impact on investor psychology. This means that if the stock market falls sharply, your dividend champions will fall on average far less than the market.

Cash-Flow

Being paid regularly allows you to create Cash Flow: having frequent cash received through dividends will allow you to greatly accelerate your enrichment speed.

More dividends each year

In the graph posted in point number 1 you can read “dividend grower”, which means what it means: the dividends paid increase from year to year (at a higher or lower rate depending on the companies). That is to say that if a company pays you 5% today, you will receive for example 5.3% next year on your securities and 6% in 3 years. This phenomenon is what is called the increase in Yield On Cost (YOC) and it is a powerful enrichment lever. This is how after several years you can end up with returns of 10, 12, 15% on the capital invested initially without doing anything other than keeping your securities. The snowball effect is very strong here at the level of enrichment since 3 factors play in your favour simultaneously: the increase in the price of securities, the increase of the dividend paid and the strength of compound interest.

Low fees

In stock exchange, there are two types of fees that come to negatively impact your long-term performance: management fees (It is the fees charged by a third person who manages your portfolio for you) and the transaction fees (whenever You will make a purchase or a sale, a fee shall be levied. It is absolutely essential to minimize the number of transactions if you want to make money. Fortunately investing in growing dividend stocks will allow you to reduce your transaction fees to a minimum since you will buy securities infrequently and with the goal of keeping them as long as possible. But if you manage your own portfolio, there are of course no management fees!

Natural protection against speculative bubbles

Speculative bubbles typically occur in highly innovative areas that enter the overheating phase. Operators overestimate the profits that will be able to realize by these companies in the future, prices disconnect from the fundamentals, and when reality takes over its rights, the bubble explodes and the speculators lose a lot of money. This is what happened in the years 2000 with the Internet bubble and more recently in the biotechnology sector. This is also why Warren Buffett is not investing in innovation. Selecting companies with a long history of growing dividends will naturally keep you away from these areas. The best dividend payers are typically well-established companies in mature industries: Coca Cola, WalMart etc.