Can Investing in Dividend Companies Make One Rich?
By Shawn Seah
This article is going to examine the issue of dividend-paying stocks: can investing in dividend paying firms make us rich, in comparison with investment in growth stocks? The literature on this topic of dividend stocks versus growth stocks is divided, with some arguing yes and some no, so let's look at the logic.
If dividends were 20% a year, and an investor reinvested dividends year after year in companies that paid the same percentage return, this would be a great idea. It's definitely workable. Just put money in regularly and reinvest, reinvest, reinvest - and Bob's your uncle!
But this assumes inflation is low, taxes on dividends are low or nonexistent, and also assumes that you can always find companies that pay 20% dividend, which is difficult if not impossible.
Some investors say, you can find companies that have paid dividends over the years consistently. Some call them "dividend kings", others call them "aristocrats of the stock market".But the issue is that if they are reliable and always pay, then the stock price would most likely reflect this in terms of higher prices and that means that their payout rate has to be low, i.e. less than 5%? In other words, their prices would reflect this dividend.
So, dividends can make you have a regular income, and can discipline savings. Yet it is highly unlikely that a pure dividend strategy would work. Perhaps one can try a growth strategy that pays minimal dividends. A mixed strategy would payoff better rather than a fixation on dividends.
Let's also look at a few more reasons why a pure dividend strategy won't work in practice. It is highly unlikely that the stock in question will rise much further since it is a consistent dividend giver and not a growth company. Therefore, a pure dividend strategy is highly unlikely to work if one thinks one can make money on capital gains.
Next, dividends in many countries worldwide are - at most - given out four times a year or once a year. And this can be cut at any point on time a recession or crisis hits. Thus, a pure dividend strategy can help you only when you're already rich.
Some astute investors note that a capital gains strategy is not necessarily at odds with a dividend play. That's because sometimes you can find a stock that delivers quite a good gain over time in capital appreciation, while also giving out a good and reliable dividend. However, that kind of stock is quite rare.
In fact, the problem is that usually the stocks that are needed for a capital gains strategy are those that are riskier and usually give no dividends whatsoever.
This brings me to the end of our short discussion on stock strategy. Dividend stocks or growth stocks? It seems that in conclusion it would seem that to make money in stocks, you might wish to build up a capital base first using a capital appreciation strategy on growth stocks and then later on in life go for the dividends - that should be the way to square the circle.
If dividends were 20% a year, and an investor reinvested dividends year after year in companies that paid the same percentage return, this would be a great idea. It's definitely workable. Just put money in regularly and reinvest, reinvest, reinvest - and Bob's your uncle!
But this assumes inflation is low, taxes on dividends are low or nonexistent, and also assumes that you can always find companies that pay 20% dividend, which is difficult if not impossible.
Some investors say, you can find companies that have paid dividends over the years consistently. Some call them "dividend kings", others call them "aristocrats of the stock market".But the issue is that if they are reliable and always pay, then the stock price would most likely reflect this in terms of higher prices and that means that their payout rate has to be low, i.e. less than 5%? In other words, their prices would reflect this dividend.
So, dividends can make you have a regular income, and can discipline savings. Yet it is highly unlikely that a pure dividend strategy would work. Perhaps one can try a growth strategy that pays minimal dividends. A mixed strategy would payoff better rather than a fixation on dividends.
Let's also look at a few more reasons why a pure dividend strategy won't work in practice. It is highly unlikely that the stock in question will rise much further since it is a consistent dividend giver and not a growth company. Therefore, a pure dividend strategy is highly unlikely to work if one thinks one can make money on capital gains.
Next, dividends in many countries worldwide are - at most - given out four times a year or once a year. And this can be cut at any point on time a recession or crisis hits. Thus, a pure dividend strategy can help you only when you're already rich.
Some astute investors note that a capital gains strategy is not necessarily at odds with a dividend play. That's because sometimes you can find a stock that delivers quite a good gain over time in capital appreciation, while also giving out a good and reliable dividend. However, that kind of stock is quite rare.
In fact, the problem is that usually the stocks that are needed for a capital gains strategy are those that are riskier and usually give no dividends whatsoever.
This brings me to the end of our short discussion on stock strategy. Dividend stocks or growth stocks? It seems that in conclusion it would seem that to make money in stocks, you might wish to build up a capital base first using a capital appreciation strategy on growth stocks and then later on in life go for the dividends - that should be the way to square the circle.
Shawn Seah is a blogger who writes on many diverse topics, primarily investment, finance and education. He has a website on Ideas on how to become rich as well as many other blogs on many diverse topics such as "How to Learn German Fast, "Get Your University Degree Online, and "English Language Resources Online". In the " Dividends Issue, Shawn discusses a dividend investment strategy.
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