How Dividend Investing Works and Why It Matters

Today we’re going to discuss dividend investing and how it impacts investment returns over the long haul. What is a dividend you may ask? A dividend is a distribution of a portion of a company's profits to eligible shareholders, as determined by a company’s board of directors. Dividends are often distributed quarterly and are either paid out as cash or in the form of reinvestment in additional shares of a company’s stock. 

Mature companies that have been established for a long-time may pay out dividends to their shareholders, whereas growth companies retain earnings and reinvest them to help the company grow faster. We can think of dividends as a reward for our investment in a company by owning shares of stock in that company. There is a select group of companies that has a long history of paying out dividends and raising their dividends regularly. This select group of 68 S&P 500 stocks is called the Dividend Aristocrats and they have all increased their dividends on an annual basis for 25+ years. We can think of these as having great track records when it comes to dividend growth stocks. Now, you’re probably curious about this list of companies. A quick Google Search will yield the full list, and many of the companies are easily recognizable. Coca-Cola Co., Mcdonald's, PepsiCo Inc., and Target Corp. are all on the list, just to name a few. 

When you buy stock, you are purchasing a small piece of a company. I don’t know about you, but I love the idea of investing my dollars in solid American companies and being rewarded for the stock investment by receiving dividends from the companies regularly. Dividend investing can be a powerful method to build wealth over the long haul and has been famously employed by Warren Buffet.

According to Hartford Funds, going back to 1960, 69 percent of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding, as can be seen below: 

The key takeaway from this chart is that buying solid companies and reinvesting the dividends regularly can help to improve your chances of building wealth on a long-term basis. 

I hope that you’ve enjoyed this piece and that it has given you some value. If you have questions about financial planning and investing, please don’t hesitate to drop me a note via email. I’d happily schedule a complimentary meeting with you to review your financial situation.

Please note that investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.