- Dividends are an underestimated contribution to the success of an investment.
- Reinvesting profits can accelerate the effect of compound interest.
- Investors who reinvest dividends benefit from bear markets.
You go to the supermarket and see that your favorite potato chips are 50% off. Buying two bags for the price of one is a no-brainer.
Then you go home, log into your brokerage account, and see that your shares have fallen 50% over the past year. This is quite intimidating, so you have to log out and wait for the prices to go up again.
Investors react very differently to these two scenarios, although they are basically very similar. Investors with money to invest, especially income investors, should welcome the drop in stock prices, and I’ll tell you why.
Why Should You Even Buy Dividend Stock?
Sometimes companies have “too much money” – which is an excellent problem. Instead of sitting on it, they can pay it to shareholders as a dividend. Investors love dividends because they are actual cash gains from the companies in which they own stock. The stock price can go up or down; Once you get paid, it doesn’t matter anymore; They are money in your pocket.
Many people assume that dividend stocks are only for retirees or those approaching their golden years. That’s because dividend stocks seem to have a good reputation for being slow-growing, boring companies that don’t bring investors meaningful returns.
annoying Standard & Poor’s International However, dividends have accounted for 32% of the S&P 500’s total return since 1926. If you ignore the dividend, there’s a greater chance that the index will underperform.
Why ‘bear markets’ are good for investors with cash
During a lecture, famous investor Peter Lynch once said, “I love volatility.” There are times when the stock market drops significantly; This has happened repeatedly in the history of the markets and is likely to happen again in the future. Investors are in retreat now!
The market is like tides, individual stocks are like boats. When the tide is strong, nearly all stocks rise in value. But if the tide remains, all the boats sink. So when your stock goes down along with the market as a whole, it’s usually not a cause for concern. Investors should be happy to be able to purchase their favorite companies at a discount.
As long as the company has strong foundations, such as:
- revenue growing.
- Positive returns.
- health record.
- Competitive advantages over other companies.
Then it is very likely that the stock will continue to rise in the long term. An investor should worry if the stock price continues to fall while the market is doing well. Always check the company’s fundamentals because it will most likely determine where the stock is headed over time.
DRIP is the Distributor Investor’s secret weapon
Dividend investors should be especially happy in bear markets. The goal of a dividend strategy is to generate income from your stocks. Think of dividend stocks as little trees of money. Every share is a tree that brings you fruits (profits), but selling a stock is like cutting down a tree – it’s worth nothing to you once you sell it.
So of course you should be happy when the prices go down, because you’re not going to sell out anyway! Lower prices mean that you can buy more shares for your money, which means you can earn more profits.
You can use Dividend Reinvestment (DRIP) to grow your portfolio even further. Dividend reinvestment means that instead of making money from dividends, you automatically reinvest it in stocks to buy more shares. These shares pay dividends that combine with your original investment to form a Ponzi scheme.
Only owning stakes in the tobacco company Altria Group From 1995 to now it would have had an average annual return of 8% per annum. If you reinvest the company’s profits instead of earning them, your annual return will double to nearly 15%. Reinvesting profits can be like fuel for a fire.
Look at the shares distributed
Dividend stocks aren’t just for retirees. It can be part of a profitable investment strategy if you use it to your advantage. Reinvest your dividends to increase your compound interest, hold your investments for the long term, and learn how to view bear markets for sale.
An article on why dividend investors should take advantage of a bear market first appeared in The Motley Fool Germany.
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This article was written by Justin Pope and published on Fool.com on May 28, 2022. It has been translated so our German readers can join the discussion.
Motley Fool owns and recommends shares in S&P Global.
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