“The beauty of dividends is that you can get paid whether or not the market is up.” – Howard Silverblatt


Recently, the market has been volatile and investors are anxious.

The statement above could be true almost anytime, depending on the day. External events, such as the recent government shutdown or foreign trade tensions, can certainly affect the stock market. However, no one can accurately predict what the whole market or any individual stock is going to do tomorrow, next month, or next year, despite media pundits.

This volatility is exactly why I’m a dividend investor. While dividends can’t be 100% guaranteed, every stock I own is highly likely to pay a quarterly or monthly dividend regardless of what the market does. The same is true for the portfolios Emperor custom designs for their clients. They only buy stocks in companies that haven’t reduced their dividend payments in at least 15 years – even during the financial crisis of 2007/2008. You can find more info about their selection process here.

So why exactly do we both love dividend stocks? Let me count the ways:

An Increasing Passive Income Stream

My primary goal as an investor is to create a growing passive income stream that will eventually replace the income from my job. I enjoy my side gig as a financial coach and personal finance author and will likely continue doing that indefinitely. But I’ll continue working because I want to, not because I have to, as dividends will pay for the bulk of my future living expenses. This means I won’t have to hope that the share price has appreciated or worry that the market may be down when I need to sell shares for income.

Not sure what passive income is? You can read more about it here, or listen to Emperor CIO, Francis Tapon, discuss it on the Fireside Finance podcast.

Being a Partner in the Business

Dividends are typically distributions of extra profit that the company isn’t reinvesting. By that logic, dividend-paying stocks tend to be financially stable and focused on growing their earnings over time. Since their earning are growing, most dividend-paying companies will occasionally increase their dividend payments per share. This increases their perceived value to investors and helps keep pace with inflation. As a result, their share price tends to go up – so if I choose to trim some shares, I’m more likely to profit. However, as a dividend investor, I get to share in the company’s profits regardless via dividend payments. I never need to sell my shares.

The Power of Compounding

Because dividends are paid in cash, I can use that cash to buy additional stocks, or I can automatically reinvest it to increase my share count. That’s how Grace Groner, who was employed at Abbot Laboratories, was able to quietly and steadily turn three shares of ABT, for which she paid a total of $180 in 1935, into more than $7 million over the course of her lifetime. She regularly reinvested the dividends and continued to hold the stock as it split multiple times, increasing her share count many times over. Grace’s story is a testament to the power of compounding that dividend stocks provide. One benefit you get with Emperor Investments’ online platform, is that you have the option to automatically reinvest your dividends. That way you too can take advantage of the power of compounding.

Sleeping Well at Night

By owning dividend stocks I’m getting paid to hold them, or in other words, ‘paid to wait’. Market fluctuations don’t keep me up at night because I don’t need to sell the stock to make money. And while it feels great when a stock I own appreciates in value, it doesn’t really matter to me because I’m relying on the dividend income rather than the gain from a sale. On the other hand, when a stock I own drops during a market correction or has a rough quarter, I do my happy dance. I’m happy because I can buy more of the same dividend-paying stocks ‘on sale’, just like Warren Buffett always says. 

Over time, my total return is enhanced by any temporary fall in a stock’s price. Reinvesting dividends and accumulating more shares during corrections and bear markets is just going to boost my return in the long run. And because companies that pay dividends tend to be more mature and stable, their valuation usually holds up better during a down market.

 

Dividend investing is a tried and true way to build wealth no matter what the stock market does on any given day. I’m down with that and so is the Emperor Team, are you?


Martha Brown Menard, PhD, is a research scientist, financial coach, and dividend income investor. She takes a smart beta approach to building her own portfolio, and likes seeing her income stream grow.