Dividend investing is the simplest stock market strategy. It is based on one simple idea: invest in stocks that can pay and increase dividends over multiple decades.
Once your portfolio is large enough, you can live off the passive income stream. For that reason, dividend growth investing (DGI) is a popular strategy among the personal finance crowd for a lot of reasons.
Here are 7 surprising benefits of dividend investing.
1. Much safer
Dividend stocks are typically much safer than non-dividend paying stocks. Dividend paying stocks have been in business for decades (sometimes even centuries). Most of them have fortress balance sheets and have a long track record of profits and cash flow.
While the past history is no indicator of future performance, these businesses have withstood the passage of time. They are typically much safer.
In fact, research shows that dividend stocks have lower stock market volatility than non-dividend paying stocks. This means you can sleep safer at night knowing your retirement nest egg is in good hands.
2. Opportunity to get a raise every year
Let me ask you something…when was the last time you got a raise at work? Maybe it was last year…maybe it was two years ago or three years go.
How would you like to get a raise every single year? What? You must be playing with me!
I’m actually not. With high quality dividend aristocrats, you can very well get a raise every single year. Dividend aristocrats are stocks that have raised their dividend every single year for at least 25 years.
Take Microsoft for instance..
In 2011, Microsoft was paying a $0.20 quarterly dividend. Six years later, it is now paying a $0.42 dividend…more than DOUBLE!
If you are relying on dividend income to fund you’re retirement this means you’re getting raise every single year! It means your quality of living is increasing every single year (or at least it’ll offset inflation).
Dividend investing allows you to get a well deserved raise every year. What other investment strategy can do that?
3. Tax efficient
If you didn’t know, dividends receive favorable tax treatment in the U.S. That’s great for people (especially those in retirement) that are solely dependent on dividend income.
Depending on your income, you could be paying as low as 0% on your dividend income!
4. Double compound interest
Einstein once quipped that compound interest is the most powerful force in the universe. And guess what? He was right!
Compound interest is incredible. It’s how so many ordinary people can dollar cost average into the stock market and get rich after 30 – 40 years.
But the amazing thing about dividend investing is that investors can earn “double compound interest.”
When you receive cash dividends from a company, you can reinvest those dividends back into the stock. When next quarter comes along, those dividends will earn dividends that you’ll reinvest, which will earn even more dividends!
So not only are you earning compound interest off your principal (amount invested), but you’re also earning compound interest with your dividend reinvestments.
As a side note, be sure to check and see if the stocks you own have a dividend reinvestment plan (DRIP).
Some companies offer discounts (which typically range from 1% to 10%) for shareholders who elect to automatically reinvest their dividends back into the stock!
5. Superior returns
Not only is dividend investing the best investing strategy for passive income retirement, but it also generates superior returns.
Consider this crazy and amazing statistic:
If you invested $100 in the S&P 500 index 10 years ago, you should have $197.91 today. Not bad. That’s a solid 98% return!
However, you would have missed out BIG time.
If you had invested that $100 into the S&P 500 Dividend Aristocrats index, it would be worth $254.25 today! That’s nearly 30% higher than the regular S&P 500!
Dividend stocks have been proven to outperform over many decades. If you only invest in dividend stocks and stick with that strategy, I am certain you will retire well off.
6. Passive income
Passive income is the holy grail of income. Dividend investing is one of the best methods to achieve passive income retirement.
Most of the work in researching dividend stocks is done in the beginning right before you actually purchase the stock. After that, there might be a few hours of maintenance research during the quarter when they report results.
However, other than that, the income is pretty much passive. That’s why so many people are turning to dividend investing for their retirement needs.
7. Special dividends
One of the biggest arguments for dividend stocks is the fact that you receive regular payments for holding onto a stock.
However, people sometimes forget that great companies also pay special “one time” dividends once in a while.
One of the best examples of this is Limited Brands (which owns Victoria’s Secret).
Limited Brands (LB) has paid out 3 different special dividends over the past 4 years, which amounted to $5 per share. Special dividends are often large in nature (relative to the regular dividend payment).
Companies pay special dividends for a variety of reasons. First, they might just want to reward shareholders. Second, it might be for tax purposes. A few years ago, there were talks about a tax increase on dividends, which prompted some companies to make big one-time dividend payments.
Finally, in the low interest rate environment, some companies even borrow debt (at every low rates) and pay shareholders via a special dividend.
One recent example of the special dividend is Costco, which paid out a whopping $7 special dividend!
Overall, there are a ton of benefits of dividend investing. No matter if you’re just starting to save money or in retirement, I firmly believe there is a place for dividend investing for your portfolio.
Readers, think I a surprising advantages of long-term dividend investing? Conversely…what do you think are the disadvantages of dividend investing? Let me know in the comments below!