by Dividend Growth Investor | September 12, 2012 10:00 am
Dividends provide a return on investment, which is much more stable than relying on capital gains. Investors who select quality dividend paying companies with long histories of dividend increases can ignore the day to day fluctuations in the markets. As long as the company is paying the dividend every month/quarter like clockwork, and can afford to do so, any declines in stock prices will be more of an opportunity to buy stocks at a discount than a reason to be worried about putting food on the table.
Dividend investors are thus essentially getting paid for holding on to their stocks. They could choose to spend those dividends on everyday expenses, or they could choose to buy more shares when the time is right.
Investors should choose companies which have strong competitive advantages to keep increasing earnings over the next decades. This would create a trickledown effect as it would allow these corporations to raise dividends. By reinvesting a portion of earnings back into the business, these dividend paying companies would be able to expand operations and remain competitive.
Due to inflation, the purchasing power of the dollar is decreasing each year. That’s why it is important to select companies with growing distributions, in order to maintain the purchasing power of your income. When this is achieved, the dividend investor can safely live off dividends in retirement, while letting their principal compound quietly in the meantime.
In essence, dividend investors are having their cake and eating it too– they generate an income stream that maintains purchasing power while also enjoying capital gains that maintain the purchasing power of their principal as well.
Contrast this to traditional retirement strategies focusing on asset depletion, where a flat market can lead to running out of money prematurely. A retiree who had the misfortune to retire in 2000, invested their nest egg in index funds and followed the four percent rule, would have less than seven years worth of expenses today. A retiree which purchased dividend growth stocks and spent only the dividends received, would be in a much better situation.
Receiving dividends in your brokerage account is reassuring, even during times of increased volatility in the stock market. The following attractively valued dividend stocks essentially pay their stockholders to hold their stock:
Johnson & Johnson (NYSE:JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has regularly boosted distributions for 50 years in a row. Yield: 3.60% (analysis)
McDonald’s (NYSE:MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. This dividend aristocrat has regularly boosted distributions for 35 years in a row. Yield: 3.10% (analysis)
Philip Morris (NYSE:PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands includes Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company has consistently raised distributions since its spin-off from Altria (NYSE:MO) in 2008. Yield: 3.40% (analysis)
Realty Income Corporation (NYSE:O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. This dividend achiever has regularly boosted distributions for 18 years in a row. Yield: 4.20% (analysis)
While focusing on the best dividend stocks will provide investors with an edge in the markets, investors should not forget about diversification either. Having adequate exposure to the market leaders in several sectors should lessen the risk for income portfolios. In addition, investors should also avoid paying top dollar for dividend stocks. Overpaying for your investments can lead to sub-par returns for long periods of time.
Full Disclosure: Long JNJ, WMT, O, PM
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