Dividend Paying Stocks and Why They Are Good Investments

Dividend Paying Stocks and Why They Are Good Investments

Posted on 22. Mar, 2011 by in Retirement

Income investing is one of those investing strategies that are many times overlooked by people who are new to the world of investing.  There are many ways that this strategy can be executed but for the purpose of this article we will be discussing dividend paying stocks and why they make solid additions to a portfolio.

The most important thing in investing is earning a good return on the money invested and avoiding risky moves that can lead to a loss of principal.  This concept is the most basic and least understood, especially when we hear about people who invested in overvalued companies out of hype and ended up losing large sums of money when a market correction took place.  Legends in the field of finances and like Benjamin Graham and Warren Buffet have mentioned this hundreds of times.

So how does this principle apply to dividend paying stocks?  Benjamin Graham, who was Warren Buffet’s mentor, believed that stocks that paid dividends continuously for many years without interruptions was an indication that the company was solid and could be a very good buy if it was selling at a reasonable price.  According to Graham, companies like these had a higher margin of safety.  Not only can dividends be reinvested and result in the holder having more equity in the company as time passes, the dollar cost averaging effect of reinvested dividends can help protect the shareholder from loss of principal in the event that the shares of the company go down in value.  If shares of the company actually go up, the result is a total return on investment that is a lot higher.  Investors that accumulate many shares over the years may even end up living off these payments and many times reach financial independence at a younger age than most people.

History has proven that dividend paying stocks give better returns than others that do not send payments to their share holders over the course of many years.  However, it is very important to buy reliable dividend stocks for this to happen and if possible to store them in tax advantaged accounts like IRAs or 401k plans in order to reduce taxes.

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