Why should you invest in dividend growth stocks in 2022
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When we think of stock trading, the phrase “buy low, sell high” is often referred to as a strategy for success. But there is another way for investors to make money in the market: through dividends.
In short, dividends allow companies to pay investors a share of their profits. Shareholders benefit because each share they own entitles them to a fixed dividend payment. Companies pay dividends in the form of regular payments, either in cash or in the form of additional shares of the company, usually monthly, quarterly or annually. For this reason, you can almost think of dividend-paying stocks as a way to earn passive income.
“Dividend growth from high-quality companies can have a significant positive impact on a portfolio,” Daniel Milan, managing partner of Cornerstone Financial Services, told Select. “Albert Einstein summed it up nicely when he called compound interest ‘the eighth wonder of the world.’ Reinvested dividends are a huge engine of growth, much more than just market returns.”
In addition to providing a steady stream of income, dividend-paying stocks have become part of the conversation lately, as they also protect your money against inflation, making them ideal for today’s market conditions.
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How Dividend-Paying Stocks Hedge Against Inflation
Big companies that have a long history of paying regular dividends every year have something to their advantage in an inflationary environment: they can withstand — and in fact benefit from — higher prices.
“The good thing for equity investors is [that] in the medium and long term, as the prices of products and services increase due to inflation, [a] the company’s revenues, profits and dividends will increase,” says Clark Kendall, Certified Financial Planner, President and CEO of Kendall Capital.
Kendall cites dividend-paying stocks like IBM, Johnson & Johnson, Procter & Gamble and Kellogg as examples of great ways to protect investors’ long-term purchasing power when the prices of goods and services rise. “As interest rates rise, focus on the valuations of the companies you own…and own good companies,” adds Kendall.
Specifically, Milan recommends looking for a portfolio of stocks with strong cash flows that yield an average of 3-4% or more and steadily increase dividends by 5-10% each year. “These are the types of businesses you should be targeting,” says Milan.
Kendall and Milan aren’t alone in their thinking. Mike Schenk, deputy advocacy director for policy analysis and chief economist at the Credit Union National Association, agrees that many companies with high-dividend stocks have long embraced business models that hold up well whenever prices rise, ultimately fueling their profits.
“Let’s face it, consumers need to heat (or cool) their homes, drive to work, and eat, even when prices are rising rapidly,” Schenk says. “Companies in the energy sector, those in the natural resources sector and those in the food and consumer staples sectors generally have strong pricing power and cost management, which allows them to raise prices, maintain demand and increase profits.”
Schenk’s remarks are also supported by past performance – he notes that historically, dividend payments have accounted for around 40% of total stock market returns. Especially in times of inflation, investors can benefit from portfolios that include stocks that increase their dividends the most.
What investors should keep in mind
Schenk is quick to suggest that average investors most certainly invest in stocks with dividend growth, but also reiterates that investment decisions should be made with care.
In times of rising inflation, he adds, portfolio rebalancing – responding to events in real time – can be costly. “Inflationary pressures have been building for some time and many high-dividend stocks are already priced to reflect these developments.”
In general, his best advice is to have a long-term view, to seek Build a diversified portfolio of securities and resist the temptation to time the market and shop around. You can buy stocks and build a portfolio through top stock trading platforms that don’t charge commission fees, including TD Ameritrade, Ally Invest, E*TRADE, Vanguard, Charles Schwab, and Fidelity. Or if you want a simpler interface and trading platform, consider an investing app like Robinhood.
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When it comes to profiting from dividend-paying stocks, remember that slow and steady wins the race. “Discipline and patience is what is needed for a successful approach to dividend growth investing,” Milan said. “These qualities are not exciting, nor are they abundant for most investors. But if we look at the history of dividend-growth stocks, they have outperformed high-yielding, non-paying dividends and dividend payers significantly with less volatility.”
At the end of the line
Dividend-paying stocks can be a great addition to your portfolio, especially in today’s environment, as rising prices can boost company earnings. If you’re wondering how you can benefit more as an investor, consider talking to a professional to help you decide what to do next.
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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.