Personally, I love investing for the long term in high-quality, dividend paying companies. I love it so much I wrote a book on it! I believe Investing in dividend stocks can be a powerful way to systematically and predictably build wealth over time. Dividend stocks are shares of a company that pay out a portion of their profits to shareholders when they are profitable and authorized to do so by their Board of Directors. Dividends are typically paid on a quarterly basis.
These payments can provide a nice stream of income for investors, even during times when the stock market is performing poorly. Investors can also reinvest the dividends to buy more shares of stock over time. Additionally, companies that pay dividends are often regarded as more stable and financially sound, as they frequently demonstrate a history of generating consistent profits.
To summarize, investing in dividend stocks can be a great way to potentially earn a steady income while also potentially growing your wealth over time.
The S&P 500 Dividend Aristocrats TR Index is a list of companies in the S&P 500 with a track record of increasing dividends for at least 25 consecutive years. It tracks the performance of well-known, mainly large-cap, blue-chip companies.
Dividend stocks vs. Growth:
- Dividend Aristocrats are primarily focused on income. These companies have a long history of paying and increasing dividends, which means they return part of their earnings to shareholders on a regular basis. They tend to attract income-seeking investors, such as retirees, who prefer steady cash flow over capital appreciation.
- Growth Stocks, on the other hand, are companies that prioritize reinvesting their profits to fuel expansion, innovation, and market share. They typically don’t pay dividends or pay minimal ones because they channel earnings back into the business to drive growth. Investors buy growth stocks for the potential of significant price appreciation over time rather than for dividends.
Volatility:
- Dividend Aristocrats are usually large, well-established companies with stable revenues and cash flows. Because of their size and market dominance, they tend to be less volatile and are considered lower-risk investments. These companies often operate in industries like consumer staples (e.g., food, household products) and utilities, which generally considered less-volatile even during economic downturns.
- Growth Stocks are often in sectors like technology, biotech, or consumer discretionary, where future growth potential is high but more uncertain. These stocks tend to be more volatile and risky because their prices are highly sensitive to market expectations about future growth. A bad earnings report or economic downturn can cause large price swings.
Maturity and Business Cycle:
- Dividend Aristocrats are typically mature companies with well-established business models and dominant positions in their industries. Since they’ve reached a level of stability, they can afford to return money to shareholders rather than reinvesting all their profits as long as their Board of Directors approves.
- Growth Stocks are usually in an earlier or rapidly growing phase of their business cycle. These companies often operate in industries experiencing fast change or innovation, and they prioritize growth and expansion. They have high growth expectations and are more likely to reinvest capital into research and development, acquisitions, or scaling up operations.
Returns:
- Dividend Aristocrats work to provide a combination of dividend income and modest capital appreciation. Much of the return for these stocks comes from their dividends rather than large stock price increases.
- Growth Stocks offer capital appreciation as the main source of return. Investors typically buy growth stocks with the expectation that the stock price will rise as the potential company grows its earnings over time. They may or may not provide regular income through dividends.
Goals and Objectives:
- Dividend Aristocrats may be suitable for income-focused and conservative folks. These are often individuals who want steady, reliable income, such as retirees or those with a lower tolerance for risk.
- Growth Stocks tend to be favored by aggressive, long-term investors looking to build wealth over time through capital gains. These investors typically have a higher risk tolerance and are willing to accept short-term volatility in exchange for the potential of larger long-term returns.
- Dividend Aristocrats may be suitable for those who want investments considered to be less volatile and provide income through dividends.
- Growth Stocks may be suitable for folks willing to take on more risk in exchange for the potential of higher returns through stock price appreciation.
Both types of stocks have their place in a well-diversified portfolio, again depending on an investor’s goals and risk tolerance.
Any opinions are those of Rob Legenhausen and not necessarily those of Raymond James. Dividends are not guaranteed and must be authorized by the company’s board of directors. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation.
The S&P 500 Dividend Aristocrats TR Index is a list of companies in the S&P 500 with a track record of increasing dividends for at least 25 consecutive years. It tracks the performance of well-known, mainly large-cap, blue-chip companies. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.