Why Stock Dividends Matter, and How They Build Your Wealth (2024)

Take a look at the investment headlines and it’s unavoidable: Stock exchanges and share prices dominate the day, with sectors such as energy and high-tech coming in a close second.

“It’s hard to escape the daily stock market prices,” says Grant Moore, a CFP with Savant Capital Management. “Whether it’s on the news, on an app on your phone or in the paper, the S&P and Dow are seemingly everywhere.”

Ah, but what about the tally of the dividend — or for some, the ho-hum dividend? The frumpy dividend? The dividend that lacks that headline-grabbing bite?

Too often these payments — extended to shareholders as a result of quarterly excess earnings — are held in low esteem by some investors, or else overlooked. In part, it’s a question of jargon: What the hell is a dividend, anyway? Share prices anyone can understand. Stock splits seem logical. But what’s a dividend if not Wall Street chump change?

First, a quick primer: Acompany is divided into shares of stock and sometimes, the board of directors decides to divide part of the profit earned by the business among the different stockholders and mail them a check for their cut of those earnings. For example, if a business earned $100 million in after-tax profit, the board may decide to pay out $50 million in dividends and reinvest the other half into expansion, reducing debt, or launching a new product. Simple enough, right?

The Value of Dividends

And as for their value, think long term. A reinvested dividend means more stock, which means more wealth as stocks climb the ladder. “Dividends can provide consistent cash flow over time so that investors may not even need to sell the stock if they’re able to just live on the dividend,” Moore says. “As a result, too much emphasis is placed on just the stock price alone.”

“Over a long period, reinvested dividends can accumulate a large number of shares, which can be worth substantially more, especially if the shares appreciate,” says Yale Bock, president, Y H & C Investments. In the long run, “return analysis has shown approximately 40% of the total return — capital appreciation plus income — is attributed to dividends.”

“Investors generally do not recognize the importance of dividends,” adds Douglas H. DeLong, senior vice president and portfolio manager at Pennsylvania Trust, a wealth management and investment firm in the Philadelphia region. “But according to a study by Strategas Research Partners, dividends have contributed over half of the market’s total return over the past 85 years.” Since 1926 in fact, according to a 2014 report from BNY Mellon.

Turns out dividends are sexy, after all.

Picking Dividend Stocks

Here are some key things to look for when picking stocks for their dividend value:

Some dividend kingpins fly below the radar.
While some flashy tech companies have flirted with trouble — for example, LinkedIn rescued by Microsoft Corp. (MSFT) in December 2016, Twitter's 2016 #superslump — compare that to Apple (AAPL), a company on everyone’s investment radar. It didn’t start doling out dividends until 2012 — five months after the passing of Steve Jobs. The last time the tech giant gave them out? 1995: nine years before the first MacBook Pro laptop.

Other dividend winners are almost a sure thing in terms of returns.
Johnson & Johnson (JNJ) is known in financial parlance as a “dividend aristocrat.” Since the 1970s, the New Jersey-based health care and pharmaceutical giant has increased dividends almost every single year. Even the mighty Apple hasn’t managed an unbroken string over just four short years.

In April 2016, J&J’s dividend jumped a stunning 6.7%, upping the payout from 75 cents per share to 80 cents quarterly. Sure, a Band-Aid variety pack costs about 12 bucks. But over 54 years and automatic reinvestment of dividends into shares, you could probably buy enough bandages to fill a semi.

Dividends can mean a retirement boon.
This boils down to a number of key factors, says Sean O’Hara, president of Pacer ETFs, an exchange-traded fund issuer based in Paoli, Pennsylvania. “We would argue that stocks with high free cash flow yield and high dividends are good holdings for investors, especially retirees. They generate higher income, have better growth potential and more downside risk management than broad-based indexes or other equities with less solid fundamentals.”

Look for "ruler stocks."
When you’re searching out reliable dividend returns, try this simple graphical exercise. Place a ruler on a graph from the start of dividend payments to the end. Now, look for the champions where most points line up very close to the ruler. “Colgate Palmolive (CL), Procter & Gamble (PG), and Coca Cola (KO) are all examples of ruler stocks,” says Bob Johnson, former president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.“Ruler stocks are ideal for dividend investors because of the consistency in the dividend growth.”

Or, if you prefer: They’re a great measure of wealth creation.

Why Stock Dividends Matter, and How They Build Your Wealth (2024)

FAQs

Why Stock Dividends Matter, and How They Build Your Wealth? ›

Dividends can have a big impact on your portfolio over time. They can help generate income during retirement or earlier and can also be reinvested to increase your total investment return.

Why are stock dividends important? ›

Stocks that pay dividends are a major component of any well-constructed, long-term portfolio. That's because dividends drastically increase a stock's total return — your true rate of return including income and capital appreciation — over time and provide cushion when stocks decline.

Are dividend stocks a good way to build wealth? ›

A dividend is typically a cash payout for investors made quarterly but sometimes annually. Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.

What are the benefits of dividend stocks? ›

There are a couple of reasons that make dividend-paying stocks particularly useful. First, the income they provide can help investors meet liquidity needs. And second, dividend-focused investing has historically demonstrated the ability to help to lower volatility and buffer losses during market drawdowns.

How do dividends and investments play into wealth? ›

Dividend investing can be a great investment strategy. Dividend stocks have historically outperformed the S&P 500 with less volatility. That's because dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price. This total return can add up over time.

Why do dividends still matter? ›

As dividends are a form of cash flow to the investor, they are an important reflection of a company's value. It is important to note also that stocks with dividends are less likely to reach unsustainable values. Investors have long known that dividends put a ceiling on market declines.

How do dividends impact the value of a share of stock? ›

After a stock goes ex-dividend, the share price typically drops by the amount of the dividend paid to reflect the fact that new shareholders are not entitled to that payment. Dividends paid out as stock instead of cash can dilute earnings, which can also have a negative impact on share prices in the short term.

How do dividends increase shareholder wealth? ›

After stock price drops proportionality caused by paying stock dividend, stock price generally increases in certain degree so stock dividend will increase circulating shareholders' wealth indirectly.

Do rich people buy dividend stocks? ›

Ultra-high-yield dividend stock No. 1 billionaires can't stop buying: AT&T (6.54% yield)

Do dividends make you money? ›

Dividends can have a big impact on your portfolio over time. They can help generate income during retirement or earlier and can also be reinvested to increase your total investment return.

What are the pros and cons of stock dividends? ›

The Pros & Cons Of Dividend Stock Investing
  • Pro #1: Insulation From The Stock Market. ...
  • Pro #2: Varied Fluctuation. ...
  • Pro #3: Dividends Can Provide A Reliable Income Stream. ...
  • Con #1: Less Potential For Massive Gains. ...
  • Con #2: Disconnect Between Dividends & Business Growth. ...
  • Con #3: High Yield Dividend Traps. ...
  • Further Reading.
Nov 22, 2023

Why is dividend investing superior to growth? ›

Some of the advantages of dividend stocks are that they tend to outperform growth stocks, offer consistent cash flow at regular intervals, and because stocks that offer dividends typically indicate that a company is financially healthy enough to pay shareholders cash, the investment can be less risky.

What is the purpose of share dividend? ›

Why do companies pay dividends? Paying dividends allows companies to share their profits with shareholders, which helps to thank shareholders for their ongoing support via higher returns and to incentivise them to continue holding the stocks.

How is it possible that dividends are so important? ›

Key Takeaways. Companies that issue dividends can provide inherent fidelity to the financial state of the company; unhealthy companies are generally not in a position to provide dividends to their shareholders. Even during periods of recession, dividend stocks have historically shown growth.

Why is dividend per share important? ›

Dividend Per Share (DPS) is the total amount of dividends attributed to each individual share outstanding of a company. Calculating the dividend per share allows an investor to determine how much income from the company he or she will receive on a per-share basis.

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