The Importance of Dividends

How important would you take dividends into consideration when buying a stock? Personally, I take dividends quite seriously, and it is one of the key criteria before I decide to make a transaction. If I come across a stock that doesn’t give dividends, I will most likely skip to the next stock – unless the stock has a very good reason for not giving dividends.

There is even a term for investors who highly emphasize on high yield dividend stocks, and they are called income investors! A fellow blogger and my good friend, Warriortan, gets a significant amount of passive income from this method and blogs about how you can do the same.

My personal portfolio also has an average dividend yield of 4.22% to 4.87% as it consists of REITs (average 6-7% distribution yield) and other relatively decent yields (Keong Hong, Tat Seng Packaging and ComfortDelgro dividend yields are ~5%)

Paying out dividends, in its way, is the company showing the shareholders that they care about their money, and thanking them for being a owner of their company regardless of how big or small their share is in the company. It is also a good way to provide short term gratification to the investor since they are somewhat similar to realized gains.

Did you know that Google and Berkshire Hathaway are some stocks that do not issue dividends? Although it would seem like their managements are somewhat stingy in this sense, many people still buy their stocks because their capital can be maximized better than distributing it back to their owners.

Think slightly more long term. Say Berkshire Hathaway (BH) provided a dividend yield of 5% of their profits every year. So cash holdings in BH will decrease by 5% and you might be contented with this payout. Would you be happier if you knew that this 5% could actually have been used to generate 20% returns? You would if you can generate returns more than 20% by yourself, but unfortunately that doesn’t apply to the majority of investors, so you might have been better off trusting your money with Warren Buffet and his management.

So this is the only reason why I would buy a stock if it did not give dividends. The company itself is confident enough to ensure that you would get back more than what you would expect it to.

Alternatively, you could also take this 5% and reinvest it into the company. This also means that there are more options presented to the investor. Paying a dividend shows that the company was profitable in that financial year, and an increase in dividends in subsequent years would reflect that its business is healthy.

So now, how about we compare the historical performance of stocks that give dividends, and stocks that don’t?

There is a full report here about it, but I will extract the more important demographics out from the white paper of Hartford Funds.

divivsnodivi

divireturns

divipolicy

In a general overview, just by investing in dividend payers as compared to non-payers, your investment will grow 1000% more from a period from 1972 to 2016! Very big difference if you started investing 40 years ago.

That’s insane, if you ask me. $100 will grow into $2000 versus $200.

As for me, dividends will continue to be an important selection criteria when picking stocks. I would say that it is the easiest way to get “passive income“, especially if you invest in stable companies that have great dividend policies. As the business grows, its dividends would also grow if there is a commitment that a certain percentage of their dividends have to be paid back to shareholders.

And as DPU grows, the stock price will naturally follow too.

What about you? Do you consider dividends when buying stocks?

Thanks for reading!

Miss Niao xoxo

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Author: Miss Niao

Hello! I blog about financial matters and things that average people can do to have a better retirement. I want to inspire people to take control of their money and have a better understanding about it. If you are interested to know more, follow me @ missniao.wordpress.com! :)

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