Are you one of the many that think that the stock market is set to fall? Are you hesitant to invest in the market? Well, many people believe that the stock market is too high at the present values and is set for a significant correction or even a switch to a bear market. As I have written previously I, do think that many of the individual stocks in the overall market are priced fairly while some are on the expensive side. There are sectors that have not seen as much appreciation as others developing investing opportunities still to be had. But reliable companies, which are paying good dividend yields do deserve a look as well. And if the prices of stocks does decline then this high-quality dividend yields will look even better.
If the markets do go into correction mode then intelligent investors will not be selling their top dividend stocks but will rather see this as a buying opportunity to acquire more. By taking this strategy, it is a move that can pay off over the long term. Since 1929 half of the S&P 500’s return, has come from dividend paying stocks. These dividend paying stocks have historically been a valuable source of income for people in retirement as until recently it has outpaced inflation.
By investing in high-quality dividend paying stocks, this can help offset the possible correction that many predict in the overall markets. While many do not see the markets making a complete collapse as it did in 2008 and 2009 but rather a slowing of growth from around 10% closer to 7.5% for large-cap stocks. If that interests you then consider that the S&P 500 since 1929 has had a return of about 9.5% annually with dividends being reinvested. Now consider that dividends are not reinvested that return slips to around 5.2%. The power of dividends becomes apparent here as compounding is an investor’s greatest ally. Here is an example of the power of dividends in the S&P 500 since 1929. If you invested $100 back then it would be worth a little over $7,000 today but if you take dividends into account and had reinvested them you would have over $178,000 from that same $100 investment.
If the power of compounding dividends is not enough on its face value then consider that most dividend paying companies are sitting on piles of excess cash. Yes, many are reinvesting the money into capital improvements or share repurchase programs but at some point, there is more cash than these projects can handle. Excluding financial institutions companies held over $1.6 trillion is cash reserves just half way through 2014. With that much money sitting, idle shareholders will begin to demand dividend increases. Considering that historically the S&P 500 had a payout of around 50% it currently is less than 40%. At some point, the system will revert to the norm and approach the 50% payout again.
With low-cost exchange traded funds and indexed mutual funds, it is easier now than ever in the history of investing to become truly diversified. And please remember that dividends are also tax-advantaged in the US with most being treated as long-term capital gains and not ordinary income as is the case with interest on bonds.
Regardless of where stocks go, a high-quality dividend paying stock is worth the investment. Do not only chase a high dividend yield but seek out quality dividend paying stocks instead. I guarantee that if you do this you will not be sorry. If you have any questions or need further information, please do not hesitate to contact me.
