The Power of Dividends * Investor Insights

The Power of Dividends

By Susan Lassiter-Lyons | Dividends

Mar 01

dividends

For many people, choosing where to invest is a hard decision. Should you invest in a company that may grow dramatically in the next few years? Or are tried and true institutions the way to go?

Lots of people go for the fun, new startups whenever they come onto the market. That’s fine!

But for people willing to stick with an older, more established company, there’s a secret reward waiting for them: Dividends.

First of all: What are dividends?

A dividend is essentially a reward from a company to its stockholders when profits are up. They can take the form of extra shares, cash, or other payouts. Companies can issue them annually, quarterly, or on an unconventional schedule.

Why would a company just give away part of the profits from the last year? Things start to become clear when you learn that companies that issue dividends are usually companies that are no longer in high-growth stages. At a certain point, they may not be permitted to invest in their company any more than the other shareholders. So why not spread that money around?

These are also companies where things have stabilized and the people running them are more interested in being stable. Dividends are a way for them to reward their investors and provide social proof that they are interested in profit above everything else.

It’s certainly not mandatory for a company to give out dividends. Microsoft didn’t issue a dividend to its investors until 28 years after the company was founded. Dividends are a bonus reward that not every company chooses to distribute. But for those who do, it’s a boon to their investors.

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Dividends create intrinsic value for companies.

Even more than their stock price, a dividend (and any fluctuations it may have) can influence the image of a company as stable vs. unstable.

If a company is able to distribute dividends, this creates a certain impression of the company. It speaks volumes that the company doesn’t necessarily need to invest directly back into themselves. Or, even better, that they can do so and still afford to give their investors a healthy dividend back.

Psychologically, this speaks volumes. Sustaining dividends gives an impression of success and signals health to investors. That can play out well with outside appraisals.

That’s also why it’s so meaningful when dividends are threatened. In 2016, there was serious fear that BP would lower or even cut their dividend after oil sale prices were threatened by world events. ConocoPhillips had already lowered theirs by two-thirds! Thankfully, the numbers corrected themselves and BP investors still got a dividend.

Increase your yield with paying dividends.

A dividend is probably not going to pay you enough to be akin to a payday. But dividends that pay cash or a cash equivalent are a fantastic way to increase your cash yield. They’re independent of the actual shares of the company and interest. Companies can also easily increase dividends over time.

Dividends may end up a fantastic choice for people new to investing who want something stable that will pay out without a fuss. This creates a “living portfolio” that provides payments outside the normal buy-sell cycle (and may give people peace of mind enough to make better long-term decisions).

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Fan of compound interest? You’ll love dividends.

If a company offers an option for reinvesting dividends back into the company, chances are that there’s lots of money to be made!

Dividends are already highly dependent upon a company’s growth. The more growth, the higher the dividend. Reinvesting a company’s dividend by buying more stock during a boom time allows for an increased profit at the moment of greatest potential earning. You may even end up beating the market average by allowing reinvestment.

Unlike certain landmarks in a stock’s life (such as an IPO), dividends aren’t something a company achieves just once. Certain companies have been paying out dividends for decades. That’s plenty of time and opportunities to earn a bonus investment.

Dividends: The reward for investing in stable companies.

The companies that offer dividend payouts aren’t the Facebooks and Twitters of the world. They include companies like Coca-Cola and Microsoft—the older, more proven companies on the stock exchange.

Dividends are a popular choice for people looking to earn passive income through investing. It’s comparable to running an AirBnb rental in that it uses an existing investment to make money in a new way. It doesn’t happen in a short time, according to the community. But there are several resources for the people willing to develop a dividend-heavy portfolio in the hopes of achieving future wealth.

While it’s important to go where growth is expected, consider investing in more stable companies that offer dividend options. You may be very pleased with your payout over time!

  • Sheila Holmes says:

    Great info.

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