Why I Think Dividend Stocks Could Make You A Millionaire

Dividend stocks could deliver more than just a strong income return in my opinion.

While dividend stocks may be viewed by some investors as mature, lower-risk companies that do not offer a high level of capital growth potential, they could deliver surprisingly strong total returns in the long run.

Dividends suggest that a company is in good financial health, while a rising dividend may indicate that company management is positive about its future earnings growth rate. Furthermore, with investors continuing to demand high yields, stocks that can offer impressive income outlooks may become increasingly popular over time. This may lead to higher capital growth, as well as the opportunity for investors to generate growing returns in the long run.

Dividend demand

As ever, there are a large number of investors who are seeking to generate an income from their portfolios. This may be because they are retired, or could be due to them wanting a second income, for example. Either way, stocks that are able to display a solid track record of dividend growth, as well as the potential to beat inflation when it comes to future dividend rises, could become popular among income-seeking investors. Over time, increased demand from investors may reduce their yields and increase their stock prices.

Financial strength

While it is always worth checking the balance sheet strength and cash flow of a company before buying it, a track record of dividend payments can provide guidance on its financial strength. For example, a stock that has a long history of paying growing dividends may be more likely to have a stable financial future than a company which has a patchy record of dividend payments. This could equate to lower risk which, in turn, may lead to investors placing a higher valuation on it over time.

Increasing optimism

The potential for a rising dividend may indicate that company management is becoming increasingly positive about its prospects. This could be due to improved trading conditions, or the potential impact of a new strategy, for example. Either way, a fast-rising dividend may indicate that the company in question has the capacity to generate improving levels of profitability that will allow it to afford to raise the level of shareholder payments. This could lead to investors becoming increasingly positive about the prospects for the stock, which may mean that a higher rating is required.

Reinvestment

The strategy of most investors is to buy low and sell high. However, one challenge in doing so is a lack of cash which is available to invest when there is a bear market. Dividend stocks can be useful in providing this, since resilient and robust companies with defensive business models may be able to maintain their payments to shareholders during challenging periods for the wider economy.

Those dividends can then be redeployed to buy high-quality stocks trading at lower prices. As such, dividends can provide a useful cash inflow for investors during a variety of market conditions. This can be used to strengthen their portfolios during the most opportune periods.

More on Investing

data analyze research
Dividend Stocks

The Best Stocks to Invest $1,000 in Right Now

Add these two TSX stocks to your self-directed investment portfolio if you have $1,000 that you want to get the…

Read more »

ETFs can contain investments such as stocks
Investing

3 Canadian ETFs I’d Hold in a TFSA and Never Sell

These Canadian equity ETFs are fairly affordable and diversified.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

TFSA Millionaire Goals: Here’s How Much You Should Save Monthly

Here’s how to maximize the potential of your TFSA and find one of the best TSX stocks to help you…

Read more »

Man in fedora smiles into camera
Investing

How to Budget for 30 Years of Retirement Without Running Out

Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) stands out as a great income ETF for retirees.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

4 TSX Dividend Champions Every Retiree Should Consider

Fortis and these three quality TSX stocks are championship ideas for retirees looking to maintain and grow their wealth.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Each and Every Month

Canadian retail centres titan SmartCentres REIT (TSX:SRU.UN) pays monthly distributions yielding 7% supported by industry-leading occupancy. Could this be your…

Read more »

oil pump jack under night sky
Energy Stocks

The Oil Shock Is Here: How to Protect Your Investments Now

For investors looking to protect their portfolios from this rampant oil shock, here are three top stocks to consider buying…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Canadian Investors: Here’s the 1 Sector You Want to Own When Oil Surges

These Canadian energy stocks stand out as top-tier picks for long-term investors looking to benefit from oil prices, which are…

Read more »