Dividends Help You “Average In” or Buy New Opportunities
Burton G. Malkiel, the author of A Random Walk Down Wall Street has written many times in the The Wall Street Journal defending buy-and-hold investing. And one of his selling points is “dollar-cost averaging,” which most investors are familiar with.
The idea is that buying a stock at regular intervals hedges your bets. You put a set amount of money in the market when stocks are high, but also buy at market bottoms. By investing the same amount, you get more shares when prices are low, thus lowering average costs. Market timing is a tricky business, so dividends will allow you to keep buying at regular intervals to avoid buying a top. And they offer an influx of new capital that allows savvy investors to seize new opportunities.
Dividends Guarantee Market-Beating Performance
Don’t want to reinvest those dividends? Then just sit on them — and enjoy the extra returns granted you by mere virtue of owning stock.
Click to EnlargeConsidering the hucksters out there who “guarantee” market-beating performance every year with their stock picks, you’d think someone would start marketing dividend reinvestment along similar lines. While some of those snake-oil salesmen will likely fleece their customers in exchange for ugly stock picks, reinvesting dividends always works — and requires no costly advisory fees or crazy trading methods.
Here’s why: Let’s say you buy an index like the S&P or Dow, with the exact same makeup of stocks. The index’s return is your return. . . and the dividends are gravy.
Obviously, if the market goes down so will your portfolio. However, the dividends provide additional returns — in good times and bad — that guarantee your profits will be bigger and your losses will be smaller.