Reasons to invest in dividend stocks

The top 5 reasons to invest in dividend stocks are:

1. Dividend stocks are easy to analyze. The dividend discount model DDM can be used to evaluate the expected long term return rate for the investment. Other models to evaluate the stock values exist but they require much more effort to apply. In fact, the only thing easier than the DDM is buying stocks or index funds without any analysis of the expected return. This, however, is not investing but speculation.

2. Dividend stocks have a higher long term return than non-dividend stocks. It is well documented that large companies paying dividends have historically been much better investment than companies that do not pay dividends. For example, Jeremy J. Siegel notes

“The top dividend yielders are hands-down winners. If an investor had put $1,000 in a portfolio of the 100 highest-yielding stocks on January 1, 1957, by December 1, 2009, he would have accumulated more than $450,000 (assuming all dividends were reinvested). That’s a hefty annualized return of 12.5%, an average of almost 2.5 percentage points per year greater than the return on the S&P index. That same $1,000 invested in the 100 lowest-yielding stocks returned only 8.8% per year.”

The difference between high and low dividend payers is staggering 4%. Even larger difference between dividend and non dividend stocks is noted by Neil McCarthy:

“Since the beginning of 1972, dividend-paying stocks within the S&P 500 Index have returned an average of 8.76% per year as of March 31, 2010, compared to non-dividend payers’ average 1.90% return over the same period

3. Dividend paying companies have owner friendly management. The management of dividend stock companies is interested in rewarding their owners as opposed to seeking growth such for growths sake. Stock market is full of stories of companies making silly investments in an effort to keep the growth, stock price, and value of management options on the fast track. Money given to investors leaves less money for the management to burn which keeps the company lean and mean! Let’s face it: after the corporations reach a certain size, they become money making machines with healthy profits but limited growth opportunities.

3. It feels nice to get cash. Enough said.

4. Dividend income is easy to quantify. If dividend income is greater than expenses, one is financially independent. Dividend stream is easy to keep track of and a much better indicator of financial health than the widely fluctuating market value.

5. Dividend based portfolio does not require selling stocks. There are benefits in not touching the principal and just living of the dividends. The main advantage is that one does not have to worry about selling stocks during bear markets.