The Power of Dividends

Cashing in on dividends

The simplest ideas are often the best. The good old pencil for instance still holds pride of place next to laptops across many homes. Simplicity in investing though? Investing in dividend paying companies can be both deceptively simple and surprisingly powerful. At a time when banks are paying out a paltry 0.25% interest rate, we investors need to look for alternative money-making income sources. If you already own stocks then the likelihood is that some of them will be paying out dividends.

Dividend investing isn’t as difficult as it looks

 

By owning shares in well-managed businesses, you’re joining your wealth to their success. As a shareholder, you’re entitled to a share of any profits distributed as dividends. And if you don’t need those dividends today you can use them to buy more shares, meaning you earn more dividends in future. This compounding effect was called the eighth wonder of the world by Albert Einstein, and if it gets the Einstein seal of approval it’s got to be a good thing!

Over the long-term, reinvested dividends can become incredibly powerful. The FTSE All-Share has grown by 214% over the last 25 years, but with dividends reinvested this figure trebles to 644%! This is an amazing increase in value but of course, it’s only looking back in time and doesn’t necessarily mean that the same will also happen in the future.

Cash isn’t always king

Bear in mind though that there are risks. Unlike cash which shouldn’t fall in value, the value of stock market investments and the income from them can fluctuate, meaning there is a risk of loss if you time the market badly. Not only that, but the value of dividends can fluctuate depending on how well the company is doing. But compared to holding cash, stocks offer much better returns.
Admittedly cash shouldn’t fall in value, but then it won’t rise much either, especially with interest rates so low.

In contrast, successful companies are always innovating and finding new ways to improve their appeal, generate more cash and ultimately increase their dividends to shareholders. It’s also worth remembering that a rising dividend often accompanies a rising share price. So investors could benefit from potential growth in the value of their capital as well as their income. Win-win!

FinanceFanatics

Personal finance blogger who's fanatical about financial freedom, investing and making money in the UK

2 thoughts on “The Power of Dividends

  • 24th February 2017 at 1:38 pm
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    The simplest things are sometimes the best. I personally wish I had started dividend investing sooner. Mout company’s I hold are dividend aristocrats so I’m not to worried about market turbulance. I feel very financially secure with my investments and I know any short comings will bounce back.
    Keep up the great work!

    Reply
    • 24th February 2017 at 2:05 pm
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      Thank you for your comment. I totally agree with you- the best policy is to just keep on investing and forget about any short-term bumps in the stock market. Good luck with your portfolio!

      Reply

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