Investing for Dividends

When most people think about stocks and shares, they tend start out with the idea that you try and buy stocks that are cheap, and then sell them later on when they are more expensive. However, this isn't the only way to invest and make money from stocks. Today, more and more people are starting to focus on dividends, both as an investment strategy, and also a way of obtaining a steady passive income.

Up until its climax in the dot-com crash of 2001, the prevailing strategy for most stock market funds and individual investors has been to target "growth", that is, to buy companies that are predicted to grow their earnings faster than the market average. The alterative was "value" investing, where shares are bought based on the idea that companies are "undervalued" due, perhaps to short-term problems or modest growth prospects. Both of these strategies, however, depend on selling a stock at some later date for more than was initially paid for it.

Contrast this to the position of a small business owner, perhaps of a flower shop or restaurant. They will receive money regularly in the form of profits and perhaps be able to live very well off this income alone for most of their lives. In principal, an investor who owns shares in a profitable company is no different than the owner of a profitable shop. True, there are many shareholders to divide the profits amongst, but then McDonalds has a lot more than 1 store!

The fact is that most companies do pay their profits out to shareholders, but few investors pay much attention to them, instead focusing only on the share price. In part this is because most popular growth stocks have low or even no dividends, their price based on future predicted earnings. It doesn't have to be this way though, there are plenty of large companies available that have long histories of paying out a steadily rising divided to shareholders. Dividend yields (the yearly dividend payout as a percentage of the cost of the share) are available for many large, stable companies at more than 5%, far more than you can make from most savings accounts.

Investing for dividends is a strategy with numerous advantages. The most obvious is that a portfolio full of high-yield companies will be paying you money every year, money that you can either re-invest in more shares, or use to cover unforeseen expenses. This has the additional advantage of reducing the need to sell shares if you require cash, which can be very helpful if current market prices are depressed, as they are currently.

Also, in most countries, dividends are treated more favourably than other forms of income, often because a company will have already paid tax on its profits before it distributes the remaining money to shareholders. Finally, it's possible to never actually have to sell your shares, after all, why sell something that pays you a steady amount of money every year? Certainly you will often be able to get away with less buying and selling than other investment strategies, which can significantly reduce brokerage costs.

For some investors, the income from dividends can be all the income they need, allowing them to retire early, or work part time, and even if your portfolio never becomes quite that large, the regular dividend payments can act as a powerful incentive to keep investing whatever the economic conditions.