We all have noticed the ups and downs in the stock market at times. The truth is that over time stocks produce better returns than bonds or other investments. For the long-term investor, stocks have returned on average 10% annually compared to bonds 5.3%, and short-term investments 3.5% before inflation. While stocks don’t give us a straight trajectory ride upward, they do offer the greatest return over time, which is important for securing our financial futures.
Let’s look at the period January 1926 to February 2015, which is the time frame of the beginning of the S&P 500 Index to early in the new year. For $100.00 invested in the stock market with dividends reinvested and held to this year, the dollar value would be $544,200. That’s a half-million dollars for putting $100 bucks in the market and leaving it there. The same amount invested in bonds would equal $9,800. and in short-term investments $2,100. Inflation would have resulted in $1,300. change in $100. Data Source: Ibbotson Associates, 2015 (December 1925-February 2015).
Bear in mind, that we don’t have to put all long-term money into stocks. Adding a mix of regular savings, certificates of deposit, bonds and other appreciable investments is the smart thing to do. But, to emphasize again, over the long-term stocks give people the best return.
There are a number of approaches to investing in stocks and each can offer specific benefits to the investor. One method that has proven to bear fruit over time is dividend growth investing. Finding good stocks that fit the characteristics of this style, produces passive income for the investor that continues to grow over time.
Three reasons for this include cash flow, management philosophy and risk. Cash flow relates to the fact that companies that pay dividends tend to maintain a positive cash flow in order to service the dividend. Better dividend growth companies will hold less debt and concentrate on cash flow producing revenue dedicated to the dividend payment.
Good dividend growth companies have management teams who understand the importance of maintaining and growing dividends with strong cash flow. Capital is allocated with respect to company projects and goals that offer the best growth opportunities for paying dividends. Earnings and future earnings are paramount in a good dividend growth company.
Management values in dividend paying companies are sensitive to current income first and foremost. While all companies must continually look at future revenue producing projects, dividend growth companies are careful not to over concentrate on future growth orientation at the expense of current income and dividend payments.
Since dividend growth investing produces passive income for the investor, common to most dividend growth companies is they are defensive in nature and have risk propensity to withstand market swings, offering a smoother ride. These companies tend to be large, well-known, high quality businesses that have guided through good economies and bad with success, adding to investor security when buying shares of stock.
It cannot be stated enough that the most important element of a good dividend growth company is that it pay a regular dividend, and it continually increase the dividend. This gives the investor steady, passive income that is both reliable and predictable to a compelling degree.
An excellent starting place to find and learn about these companies is at the website: The DRIP Investing Resource. http://www.dripinvesting.org. DRIP stands for dividend reinvestment and is almost as important as the dividend itself. Reinvesting paid dividends buys more company stock and compounds growth. Compound income growth is the greatest secret to building wealth. This method of investing builds passive income that will consistently grow, producing more passive income for the investor.
New investors may be put off by the ups and downs of the stock market, market swings that is. It seems that the least bit of good or bad world news can send the market off to new heights or treacherous lows. While this is true, it calls to mind another important axiom of dividend growth investing. It is a long term-strategy. The longer a stock is held the less risk involved.
This chart tells the story of long-term horizon for investing in dividend stocks. Notice dividend paying stocks significantly outperformed non-dividend paying stocks, and dividend growth stocks outperformed stocks just paying a dividend.
Annualized Return of S&P 500 Index by Dividend Policy (1/31/1972-12/31/2014)
Dividend Growers/Initiators Annualized Return = 10.70%
Dividend-Paying Stocks Annualized Return = 9.28%
Non-Dividend Paying Stocks Annualized Return = 2.34%
Examples of dividend growth companies include Procter & Gamble, which pays a dividend of $0.66 per share each quarter and has raised its dividend 59 years in a row. Another company is Johnson & Johnson, paying a quarterly dividend of $0.75 per share, raising it 53 consecutive years. Target pays a $0.56 quarterly with raises for 48 consecutive years.
The share price for these companies has grown over time and investor money has grown in value, compounding investor returns. This doesn’t mean the share price ignores market swings, but it does mean a rising passive income is produced for the investor, regardless of the price per share of stock. Share values in good companies also tend to bounce back from down markets and dividends continue to grow.
Dividend growth investing in solid companies has been proven to build wealth over the long-term. Internet searches, community investment clubs, local community colleges and many other resources can guide the new investor into this exciting method of reaching financial goals.
I have been an active investor for over 35 years. With the exception of employer sponsored retirement plans, my investments have always been self directed. My preferred investment style would fall into the value with dividend growth and income method.
I have also had a life-long interest in personal finance and have taught community classes to a varied of groups.
Investment experience in Equities-REITS-Oil & Gas Royalties-Utilities-Varied Fixed Income.