No regular reader would be surprised by my statement. I thought today might be a good opportunity to take a look at why I’m a big fan of dividend investing as a long term investing strategy. I’ve already explained why I’m convinced that dividend investing will not fade away anytime soon. Sure, moves like the proposed Obama tax increase could cause a slowdown (even though others disagree) but I still think that it’s as effective of a longer term strategy as you can find. Even better, it’s relatively simple to get started with it.
Why Dividend Investing Rocks
#1 Retiring On Passive Income Is Your Best Option
A few weeks ago, I had written about the difference between buying an annuity or a dividend portfolio. My conclusion was as one-sided as you can get with the biggest benefit being that someone retiring with a dividend portfolio who is able to live off of the passive income would leave behind a huge portfolio. The annuity holder on the other hand would not get anything back from the annuity after death. It’s also much easier to not get worried about lacking money when you’re not even touching your capital base.
#2 Realistic Expectations
One major problem I see with many investors, especially those that do not know as much about the markets is that they are constantly looking for homerun opportunities. That next Apple (AAPL), Berkshire (BRK/B) or even Microsoft (MSFT). Of course, those are possible but looking for those is like looking for a needle in a stack of hay. Your odds of finding that homerun are slim and much more likely is that you will keep striking out and end up being left with much less than you’d need at retirement. Dividend investors by contrast generally have much more realistic assumptions about their returns, their investments, etc. Sure, you can argue certain assumptions such as inflation rates or dividend growth but even those are usally not that off as you can see in my post about inflation expectations.
A few weeks ago, Facebook, the company I’d love to hold, bought Instagram for $1B. Many thought that it was a great move. Others thought that Zuckerberg had overpaid and that more moves like this one will happen because of Zuck’s position of power at $FB. The problem is that it’s so difficult to value such companies. How would you possibly know? Even Facebook, which I personally believe is worth north of $100B is incredibly difficult to value. Now think about dividend stocks. Evaluating them comes down to a simple question. How much is stock X paying you every year and how much will that increase over time? We use numbers such as dividend yield, dividend growth, earnings and revenues growth (all described in the top 20 things I look at when judging dividend stocks) but it all comes down to fairly simple numbers. That makes it much easier to determine the value of a stock for a portfolio.
#4 Sustainable Stocks
While there are exceptions, I would argue that in general, dividend stocks are much more sustainable, stable over time and reliable than others. On some occasions, specific companies or sectors (banks in 2008 for example) will cut dividends but I would say that as a whole dividend payers are much more stable than the average investment, especially when you use long term sustainable dividend criteria.
#5 Warning Signs
Since dividend investors usually do their best to dump dividend stocks as soon as the business slows down, they are usually very good about dumping stocks before those stocks start declining. Why? Dividend investors always look for high and sustainable dividend growth and any stock that decides to slow that down or even stop growing the dividend entirely raises red flags. That is usually where dividend investors get out. Standard investors on the other hand will often start hoping for a turnaround or not know exactly which metric should be used.
What are your thoughts on these? Have any others to add?