First, be aware that capital gains, income and growth are the primary drivers of stock investing decisions. Depending on your own investment profile and objectives, focusing on any one - or a combination of all three - has merit. Furthermore, any one or all of the drivers can be obtained from individual stock, stock mutual fund or (stock) ETF ownership.
Our topic here will be learning the right approach to investing through income producing stock investing.
The basic of dividends:
Stock dividends are a percent of the profits distributed to shareholders by a corporation. When a company make a profit it can either choose to reinvest it in the company, to grow it, or it can choose to distribute it to shareholders. When a company business start to matures (you will not find many start-up companies paying dividends) and/or has a strong cash flow, it normally establishes a dividend policy and begins paying them.
Although there can be numerous points that can be made about the virtues (and ills) of investing for dividends, I would like to highlight some of them that are quite relevant:
Many dividend yielding stocks perform well in both rising and falling markets. During the 1982-2000 bull market, dividend paying stocks outperformed non-dividend payers by a considerable margin. In volatile and falling markets, mature companies - that have histories of paying dividends - typically continue to pay them, which add a large measure of comfort to the investor in that while the price of a share might be temporarily going down, the cash flow from dividends normally continues.
Along with the investments in various types of bonds, dividend paying stocks provide steady cash flow - perfect for a well-designed retirement plan, i.e. principle is preserved. But the major attraction of having dividend payers in that strategy is the inflation hedge they inherently create.
Look back into history, the reinvestment of dividends represents a significant portion of the overall gain of a stock investment. Clearly performance in any one year is through capital gains - but the long term gain of a stock is through the reinvestment of its dividend.
The bottom line here is that there are considerable virtues in investing in dividend paying stocks and they certainly have a place in your portfolios for both young and older investors alike.
The investing race not given towards the swift and the key to successful stock investment is to put as many factors as possible in your favor, before taking a position in the stock market. Also, implement solid money management, and you could be well on your way to making a fortune.
