It’s of the utmost importance that investors choose very carefully to buy stocks with safe dividends, as dividend cuts are more common than you think. After that hurdle, you can enjoy the many benefits that a dividend investment strategy brings.
Here, I’ve highlighted eight.
Get higher returns
There are studies that show that dividend stocks tend to outperform non-dividend payers. A reasonable explanation is that dividend stocks pay out a portion of their earnings as dividends. As a result, there are less retained earnings to grow the business so management has to pick its investments more carefully.
Positive returns in a down market
Assuming investors hold quality businesses whose share prices will rebound over time after a market crash, dividend income gives you a positive return, even in a down market.
Share prices go up and down. However, dividend stocks tend to be less volatile than non-dividend payers because there are long-term investors who are in it for the income. So, it’s generally easier to hold on to dividend stocks than non-dividend payers.
Earn a growing income from dividend-growth stocks
Dividend stocks don’t have to continue paying dividends. In fact, they can cut it anytime if management decides to do so.
However, dividend stocks that have increased their dividends for many years will tend to continue to do so because it has become a part of the company’s DNA.
Let the dividend yield tell you when to buy
The high end of Enbridge’s dividend yield range is about 4.2%. So, it’d be a decent place to buy some Enbridge shares when it yields 4.2% or higher. It just so happens that at about $55.40, Enbridge yields 4.2%.
Dividends have different uses
Dividends can be used to pay the bills or be reinvested for higher returns.
Hold a long time and get your investment back
Theoretically, dividend companies can pay dividends forever. So, eventually, you’ll get your original investment back.
If you had invested $10,000 in Enbridge in 2004, you would have gotten your original investment back by now. On top of that, you’d be sitting on unrealized capital gains of more than $30,000!
Hold a portfolio of dividend stocks and earn an income forever
You can essentially hold on to quality dividend stocks and earn an income from it for as long as you like.
By holding a diversified portfolio of dividend stocks, which tend to grow their profitability and dividends over time, you can earn growing income forever!
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Fool contributor Kay Ng has no position in any stocks mentioned.