For example, shares of Procter & Gamble (PG) have decreased by 50% at least several times over the past 50+ years. However, the company has raised dividends for 57 years in a row to its loyal shareholders.
A third reason for holding dividend paying stocks is if these companies fit the investment goals and objectives in your retirement plan. The goal of my retirement plan is that my diversified portfolio generates a sufficient stream of income to cover my expenses after I stop working. Because dividend income is more stable than capital gains, it is a safer alternative that can deliver cash to pay for expenses on a timely and predictable pattern.
As a result, the transition from being paid twice/month to receiving multiple dividend checks every month is easier on your personal finances. Therefore, if your monthly expenses are $1000 month, and your portfolio generates at least $1000 in monthly dividend income, you have achieved your objective. It is much easier to keep investing in income generating assets until you reach $1000 per month in dividend income than worrying about accumulating a certain amount of funds first, and only then worrying about how to convert that into meeting your expenses. I find dividend investing to be a much easier approach compared to withdrawing 3% – 4% of my net worth every year.
A fourth reason to keep dividend paying stocks is because they are more stable and mature than non-dividend paying ones. Only a company that generates excess cash flows that are above and beyond its needs to grow and maintain the business, will be able to pay a growing dividend to shareholders. The growing dividend is an indication of a business model that has the competitive advantages to throw off so much cash. Most companies that do not pay dividends do so because they cannot afford to pay distributions. The ones like Berkshire Hathaway are the more like an exception, rather than the norm.
Another reason to buy quality dividend paying stocks is because they are typically cheaper than some of the great growth stories out there. The growth stocks typically plow back every single penny back into building the organization. There is usually a lot of hype associated with many of those companies, which makes them sell at ridiculous valuations.
If a company like Tesla (TSLA) sells at $150 per share, this is because market participants expect it to earn several dollars per share in a few years. Given the company’s low current earnings, it seems that most of the valuation is dependent on future expectations, which can vary a great deal away from reality. If the expectations do not materialize, stock prices could be lower, and sources of return would be just from capital gains. It can work for many, but not for my style of investing.
Most dividend paying stocks are usually cheaper because a regular 6 – 9% growth is seen as unexciting by market participants. This is ok, because a low entry price, coupled with modest but consistent growth can result in compounding miracles decades down the road.
For example, if you can purchase shares of a dividend stock like Chevron (CVX) at nine times earnings, 9% earnings and dividend growth, and a 3% yield, you can do very well for yourself over time. Of course, if you can purchase the shares of a quality company that doesn’t pay dividends, you can also do well over time. However, your total source of returns would be capital gains. In my life, I prefer the diversified nature of both dividends and capital gains.
Overall, an investor would do great for themselves if they focus their energies on purchasing quality companies at attractive valuations. The vast majority of such enterprises are dividend paying ones, although there are some exceptions. In my stock portfolio, I hold only quality dividend paying companies, because I like the consistency in the nature, timing and amount of dividend payments.
Therefore, I mostly focus on the dividend contenders and dividend champions list of companies for research. As a result, despite the exceptions, I do not believe that focusing only on dividend paying stocks is limiting me in any sort of way.
Full Disclosure: Long CVX, KO, PG