How Dividends Can Add Value To A Portfolio

Last week, we took a look at 3 Ways That You Could Make Money In An Up Or Down Market. The first one that we discussed was buying shares of an individual stock directly. Today, we want to talk about one specific type of stocks that you should be adding to your portfolio. This type of stock has been shown to perform the best over time.

The best performing stocks in the market have been stocks that pay a dividend.

What exactly is a dividend and why should I care?

A dividend is a portion of a company’s profits that are paid out directly to shareholders. Dividends can be given in the form of stock which is than distributed to shareholders. These are known as stock dividends. Stock dividends allow investors to accumulate more shares of a company’s stock. The most popular form of dividends with investors are cash dividends. These dividends are cash payments that are paid out to investors typically on a quarterly basis.

Why do dividends matter to my investment strategy?

Cash dividends matter because they are the only real payout that an investor receives on their investment. For example, let’s say you bought shares of Nike at $45. The stock does well and rises to $100 over the next three years. What’s your total profit? You might be tempted to answer $55 a share but that is not the case. Your total profit is $0 until you actually sell the stock. If shares retreated back to the $45 level, you would have nothing to show for your investment.

That’s what makes dividends so important. You can realize some level of profit without actually having to dispose of your shares. High dividend stocks are also attractive because of their ability to add to the total return of a stock investment. Dividend paying stocks have outperformed non dividend paying stocks historically. Dividend income can easily add 3 to 4% to your investment return. Now you see why fixed income investors love dividends so much!

What companies pay the best dividends and are they good overall investments?

The best companies for dividends are companies that have a history of increasing their dividends historically. You want to invest in companies that are known to share their profits with investors. Mature established companies are often the ones that offer the best dividends to shareholders. High yielding dividend stocks are a great way of setting up a solid income stream.

It’s important to remember not to chase yield alone. Look for consistent stable companies with great balance sheets that have dividend payouts that you can trust. Examples of these types of companies with great dividends are Hershey’s and Heinz Company.

As you can see, dividends are a critical aspect of investing because they can keep your bank account flowing with money during times when the stock market is in the dumps. Having multiple streams of income is always a wise strategy.