Dividend stocks are enjoying a resurgence as investors seek safety during the sell-off.
I touched on winning by not losing in a bear market in yesterday’s Money & Markets Daily.
Surviving a down market is great and all, but dividend investing is so much more than that.
So today, let’s take a minute to revisit three core truths that drive my income investing philosophy.
I’m not going to recommend a stock, nor am I going to mention any recent dividend declarations.
We’re going higher than that and covering why dividends may make the difference between retiring in style and not retiring at all.
3 Dividend Investing Truths
A Better Kind of Company
I loved The Wolf of Wall Street. Yes, it’s vulgar, and I wouldn’t take life or investment advice from Jordan Belfort. But he had a quote I liked:
“Money doesn’t just buy you a better life … it also makes you a better person.”
Well, maybe it does, maybe it doesn’t. But I’d argue dividends make a better kind of company. Here’s why.
It’s harder to fudge numbers when you have to produce cold hard cash to pay dividends.
Even companies that don’t outright lie in their financial reporting stretch or obscure the truth.
A talented accountant can make your reported earnings be whatever you want them to be. But they can’t make cash materialize out of thin air.
In order to pay a dividend, the company has to have the cash to do it.
This is to say that the obligation to pay a dividend encourages more honest reporting and fewer nasty surprises down the road.
You’re the Boss
A dividend also forces discipline and aligns management with the shareholders’ needs.
We all know that the fundamental purpose of a company is to enrich its owners, the shareholders. This is Capitalism 101.
But there are “agency problems.” The best interest of the owners — the shareholders — are not necessarily the best interests of the managers running the company.
CEOs blow money on pet projects, excessive pay packages, and wasteful empire building. Paying a dividend to shareholders takes that temptation away from them, at least to a degree, and forces them to put the shareholders first.
At the end of the day, you — the shareholder — are the boss of the company. It’s not the fast-talking guy in the suit sitting in the corner office. He works for you and needs to be reminded of that from time to time.
Realized Returns
This doesn’t matter all that much for a short-term trade.
But if we’re talking about good companies you want to own for years or decades, getting paid a dividend allows you to enjoy the fruits of your investment without selling off shares.
I love capital gains. But each share you sell to meet your living expenses is a share no longer available to grow and compound.
Getting paid in cash dividends allow you to let your long-term winners ride … possibly for decades or even multi-generationally.
The Bottom Line on Dividend Investing
Not every great company pays a dividend, and you shouldn’t automatically exclude non-payers. Doing so would have eliminated some of the greatest growth stories of our lifetimes, like Amazon.com and Alphabet (Google).
But I’m a big believer that the bulk of your long-term portfolio should be solid dividend payers. They’re a better kind of company that makes you a better kind of investor.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
Story updated on July 20, 2022.