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5 Reasons Why You Should Invest in Dividend Stocks

5 Reasons Why You Should Invest in Dividend Stocks

Here at The Fifth Person, we’re big on dividends – it’s a great way for many, many people to generate stable, passive income that will grow in time and allow them to retire financially free.

Granted, it’s not the only way to invest and we also employ other investment strategies (like value-growth investing) in our portfolio as well, but if what you’re seeking is a proven way to generate stable investment returns and high amounts of passive income, then dividend investing is the way to go.

If you’re still not convinced and you think dividend investing is too slow, boring, and can’t give you the best return on your investment, then let me give you 5 reasons why you should still invest in dividend stocks:

#1 Dividend Stocks Also Give the Best Capital Gains

A lot of times, investors have the misperception that all dividend stocks have slow growth and generate very little capital gains. While this may be true for some dividend stocks, the best dividend stocks are also the best capital gainers:

dividend growers outperform

Source: Ned Davis Research

Ned Davis Research did a study on the S&P 500 from 1972-2013 and discovered that those stocks that grew their dividends over time also outperformed the rest of the index for capital growth. Every $100 invested in dividend growers grew to $5,997 compared to only $264 for non-dividend payers.

#2 Dividend Stocks Have Less Risk

Besides providing exceptional capital gains, dividend growers also outperformed with less risk! In other words, you stand to earn a higher return while facing lower risk. You no longer have to subscribe to the idea that “higher risk equals higher return”.

dividend growers less risk

Source: Oppenheimer Funds (data from Ned Davis Research)

From the chart above, dividend growers again give the highest annualized returns (10.1%) while having the lowest standard deviation (16.1). A lower standard deviation means lower volatility and your returns are more stable.

So if you’re the sort that doesn’t enjoy the rollercoaster ride that is the stock market sometimes, dividend stocks are definitely your cup of tea.

#3 Receive Stable Passive Income All the Time

We’ve already proved that dividend growers can give the best returns while having the lowest risk and it’s easy to see why: regardless of how the stock market moves up or down, good dividend stocks will always pay you your dividends every single time. And the best ones will pay you a growing dividend.

So it doesn’t matter if Greece will or will not exit the Eurozone or if China’s stock market bubble burst, as long as you hold on to your stock, you can trust that you’ll receive you dividends on time every year like clockwork.

So if your financial needs require you to generate stable passive income from your investments regularly, then dividend stocks suit your needs extremely well.

#4 Reinvesting Your Dividends Gives You Supercharged Returns

It’s already awesome enough that dividend stocks give you great returns, lower risk, and stable passive income, but if you can afford to wait a bit and delay spending your dividends today, then reinvesting your dividends can supercharge your investment returns:

dividends reinvested

Source: Triumph of the Optimists, Elroy Dimson, Paul Marsh and Mike Stanton, Princeton University Press, 2002, p. 145

From the chart above, investing in the U.S. index for capital gains alone will multiply your returns 198-fold – impressive enough. But if you reinvested your dividends, your total gain would be 16,797 – a return 8,400% higher! Incredible.

Investors always talk about the power of compound interest and in this case, the effect is drastically obvious if you just follow the simple rule of reinvesting your dividends today.

#5 Invest in the Best Companies in the World

Finally, investing in stocks that pay you stable and growing dividends year after year also means you’re investing in some of the very best companies in the world.

Why is this so?

The logic is simple. If a company can consistently pay you a growing dividend year after year, it means the company is also able to generate higher revenue, higher profit and, most importantly, higher cash flow to sustain its dividend growth. And only the best companies in the world with the most successful business models can do that every single year.

Take a look at the list of dividend stocks that have increased their dividend every year for at least the last 25 years:

dividend aristocrats

Source: Dividend.com

On this list you can see some of best and most successful companies in the world today like Procter & Gamble, 3M, Coca-Cola, Johnson & Johnson, and Colgate-Palmolive. It’s no wonder that these ultra-successful companies have been able to increase their dividends year after year for more than 25 years; in fact, the top company on this list, Diebold, Inc., has increased its dividends every year for 61 years straight. Amazing.

Conclusion

As you can see, dividend stocks are awesome investments – they offer high returns, lower risk, stable passive income, and you can sleep soundly at night knowing that your money is parked with some of the strongest and most resilient companies in the world.

At the same time, we don’t recommend you buy a stock simply because it pays you a high dividend – that’s the most common mistake amateur income investors make. There’s a LOT more analysis to be done before you can identify a good dividend stock that’s not just able to pay you a high dividend but also sustainable and growing dividends many years (or decades) down the road.

That’s why in Dividend Machines we use a stringent 8-step investment process to screen and identify the best dividend stocks out there in the market. Because if a stock passes ALL eight steps, we know we have a winning dividend stock right in our hands.

So if being a successful income investor and receiving passive streams of growing dividend income sounds like your cup of tea, then isn’t high time you got started right away?

Do you want to receive stable, passive income from your investments year after year like clockwork? Then discover the *8* steps to create your own 'Dividend Machines' and build multiple streams of passive income from dividend stocks and REITs. Build your own dividend machines now

Are you looking for a formula that can consistently pick out the best companies to invest in and make you a LOT of money in the stock market? If you are, then this might finally be the answer you've been looking for. Because this is the same exact formula we used to create 7-figure results in a single stock portfolio - and we did it in just two years. Find out what this formula is right here.

Do you think that it's nearly impossible to double or triple your investment in blue-chip stocks? If you want the stability and security of a blue-chip company but are looking for the supercharged returns of smaller, high-growth stocks, then we want to tell you that it is possible. In fact, we want to show you how we uncovered one company that's a market leader in its industry... but was still growing its revenues by up to 20.4% a year and its net profits by up to 39.8% a year. Click here to find out which company and download a FREE report that shows you how we made 243.5% returns in this "super" investment.

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This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this course material and/or document be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of the Fifth Person Pte Ltd (“the Authors”); and are merely the written opinions and ideas of the Authors, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Authors make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Authors, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.
 
Robin Han
Adam Wong

Adam Wong is the chief editor of The Fifth Person and was featured on 938LIVE as a guest expert on MoneyWise. He is also the author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy, which made the Kinokuniya Business Bestseller's List in 2013. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online. If you're interested to learn more about stock investing, you can join The Fifth Person Newsletter and receive free weekly insights on how you can generate higher returns and dividend income from the stock market.