Why Should You Invest In Dividend Paying Stocks?

Posted: 24 Jan 2008 | Categories: Investing

I believe that creating a passive income stream through dividends is an achievable, intriguing and stimulating way to decrease ones dependency on salary income alone. After doing some research, i have found that putting your money in bonds, CD’s and money market funds will only be enough to meet inflation and over long periods of time exceed it by a couple percentage points on average. Stocks on the other hand offer you the best possible investment opportunity out there. Over 30-35% of stocks performance over the past 50 years has been attributed to dividends; the rest comes from capital gains. A closer look at the S&P 500 from 1957- 2005 shows that dividends have grown on average of 5.3% per year for the index. A $1000 investment in the S&P 500 in early 1957 would have provided an stute investor with an initial annual dividend income of about $40. In 2005 though this dividend income would have grown to $610, assuming that dividends were never reinvested. This represents a 61% percent yield on cost, which definitely beats the 5-6% that someone might make from fixed income annually.

In addition to providing on with an ever increasing source of income, the initial investment would have appreciated to over $32,000 by the end of 2007. With inflation assumed to be averaging around 3 - 4% per year, the investment in dividend paying stocks would have provided the investor with an income that keeps its purchasing power year over year, which unlike fixed income securities, can also provide them with capital gains.

Even during turbulent market conditions when most investors are fixated on their capital losses, incoming dividend payments would definitely soften their losses. During the 1966-1982 period when stock prices returned 1.45% on average per year due to high commodity prices, stagflation and high-unemployment, the average dividend yield in the S&P 500 was 4.2%. Thus the total return was a little over 5.5%, which sounds pretty good considering the tough economic environment of the times. This shows that dividend paying stocks should be an essential part of an investors portfolio because they provide a cushion during bear markets while increasing their real incomes throughout good and bad markets.

For more information on dividend investing, please visit my blog at http://dividendgrowth.blogspot.com/

Article Author :Dobromir_Stoyanov