The market cycle of boom and bust, bulls and bears could be attractive as well as intimidating to any investors. Speculators are in for short term profits and momentum in the stock market and day traders get in and get out of the stock every day or several times a day. All these may make stock markets seem like a gambling den for any laymen.
The stock market is not all about speculation or trading. It is a place where companies sell a stake in their business and raise finances to fund their activities. Great wealth and fortune can be created by serious investors. They can create wealth for themselves as well as the company and the nation. Before investing in any company you must make informed decisions. You have to know and learn about the company you invest in, from past records, the quality of the management, their business activities and future plans.
One important way of knowing about the company is dividends. Many investment analysts and experts may say that dividend payout is not important for a stock to perform well. Many have even justified the idea that companies which do not pay dividends have created more wealth for the shareholders as these internal accruals can be used to further the business activities of the company. But irrespective of all such economic theories a simple and foolproof method of confirming if a company is really doing well is to keep a track of the dividend income the company pays to its share holders every year. The aim of any business is to generate profits and revenues. By owing a stock you own a business and you need to get proportional share of the profit. If the company is not paying any dividends it theoretically means that it is not generating any profits
If the dividend rates have been increasing every year we can be sure we have a safe stock. Now that such a company is bound to grow and create more wealth in future you can use all the dividend money to buy more of the same stock. Here you the shareholders are empowered. This will also mean that the dividends that you will be receiving each year will be more and more as you will have more shares in your portfolio.
This is the type of assured investment plan the investors must be doing. This is how real wealth can be built in the stock market. Many times the performances in the stock market may not reflect real economy. Sock market is driven by sentiments. We have seen in the past how the so called internet companies share prices went to dizzying heights when they never generated (nor had the hope of ever generating) a single dollar in profit year after year. Ultimately reality sunk in and these companies are now junked and are not even being traded at a fraction of their all time high prices.
When you invest in a dividend paying stock you are not at the mercy of the market sentiments. Irrespective of whether the share price goes up or down you will earn cash dividends. Even if the share price falls you can use the dividend amount to buy shares at lower prices and you have cost average advantage and that is the real benefits of dividend paying stocks.
Relevance book: "The Ultimate Dividend Playbook"
