The Power of Dividends: Why They Can Boost Your Stock Returns
Do dividend-paying stocks outperform the market?
A study by Blackrock found that between 1978 to 2022 companies that either grew or initiated dividends outperformed the S&P 500 and non-dividend payers with less risk.
Here's a visual by CommonStock highlighting the excess returns created by dividend-paying stocks:
So how can these create an impact on your portfolio?
Dividend-paying stocks can be a great way to generate passive income and compound your wealth over time. By receiving regular payouts from companies that share their profits with shareholders, you can create a steady stream of cash flow that can help you cover your expenses, reinvest in more stocks, or save for your future goals.
But dividends are not just about income. They can also signal a company's financial health and growth potential. Companies that pay dividends tend to be more established, profitable, and shareholder-friendly than those that don't. They also tend to have more disciplined management, better corporate governance, and more stable earnings.
As a result, dividend-paying stocks have historically outperformed non-dividend-paying stocks in many markets and sectors.
According to a study by Hartford Funds, dividend-paying stocks in the S&P 500 index outperformed non-dividend-paying stocks by an average of 2.5% annually from 1972 to 2018. This may not sound like a lot, but it can add up to significant gains over time.
Moreover, dividend-paying stocks can also be less volatile and risky than non-dividend-paying stocks, especially in bear markets or recessions. (refer to the image above)
Because they offer a cushion of income and support, they can help investors ride out the ups and downs of the market with more confidence and less emotional stress. They can also provide a signal of value and quality to investors who seek stability and consistency in their portfolios.
Of course, dividend-paying stocks are not a panacea, nor a guarantee of success.
They still require careful research, analysis, and diversification, just like any other investment. They also have their risks and challenges, such as the possibility of dividend cuts, high valuations, or limited growth prospects.
But for investors who seek a reliable and rewarding way to build wealth over time, dividend-paying stocks can be a smart choice.
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