I have been a fan of dividends for 30 years and they are especially valuable in times of difficulty for the markets and economy. Going back to 1960, 69% of the returns in the Standard and Poors 500 came from reinvested dividends and the power of compounding.
Einstein is cited for stating that compound interest is the 8th wonder of the world for a reason!
There is a strategy using dividends for income that outperformed the S and P 500 by a margin so large it made my mouth drop. I am happy to share the report that shows the outcome of going back and investing $1,000,000 in the year 2000 and taking out $50,000 a year for income produced very interesting results. (higher than the widely published 4% withdrawal rate by the Bengen study) The outcome is that the portfolio is worth over $5,700,000 at the end of 2022 versus the S and P 500 at $384,000 for the same time period. That is correct that it provided income of 5% a year and increased by 5X over the 22 years. If you would like a copy email me at john.lohrenz@lpl.com and type dividends in the subject line.
The primary goal of dividend investing is to generate a steady income stream from the dividends received. Investors who adopt this strategy often seek stocks with a history of consistent dividend payments and aim to build a portfolio of dividend-paying companies.
Here are a few different strategies commonly employed in dividend investing:
1. Dividend Growth Investing: This strategy focuses on investing in companies that have a track record of increasing their dividend payouts over time. The goal is to select companies with sustainable business models and strong fundamentals, which can potentially provide a growing stream of income through increasing dividends.
2. High-Yield Dividend Investing: This strategy involves investing in companies that offer high dividend yields relative to their stock price. These companies may have higher payout ratios and may be in mature industries. The focus is on generating a high level of current income.
3. Dividend Aristocrats: Dividend aristocrats are companies that have consistently increased their dividends for a specific number of consecutive years, typically 25 years or more. Investors following this strategy seek out companies with a history of reliable and growing dividend payments.
4. Dividend ETFs (Exchange-Traded Funds): Dividend-focused ETFs are investment funds that hold a portfolio of dividend-paying stocks. These ETFs provide diversification by investing in a basket of dividend stocks, making them a convenient option for investors seeking exposure to dividend-paying companies without selecting individual stocks.
5. Dividend Reinvestment Plan (DRIP): DRIPs allow shareholders to automatically reinvest their dividend payments back into additional shares of the same company. This strategy helps to compound investment returns over time by reinvesting dividends and acquiring more shares without incurring additional transaction costs.
It's important to note that dividend investing comes with its own set of risks and considerations, and investors should carefully evaluate the financial health prospects of the companies they are considering for investment.