Dividend-Paying Stocks Build Wealth While Keeping Money Safe

Marilyn Monroe might have made a mighty claim back when she sang “Diamonds Are a Girl’s Best Friend,” but modern women are seeking something a little more substantial than a stone. Women are taking on the role of Chief Financial Officer for their families, are earning their own money, and becoming financially self-sufficient. Naturally, the focus has shifted toward financial independence and security. For the contemporary woman, a more appropriate tune would be “Dividends Are a Girl’s Best Friend.”

21st Century Realities
Women in the 21st century are living longer than their 1950s counterparts; many will outlive their husbands. Today’s women also experience higher probabilities of divorce. And, significantly more are  taking on the challenges of entrepreneurship. With prosperity come challenges. The need for work-life balance has a dramatic impact on women, particularly those with families. Women today need secure ways to preserve and grow their own money, and this is where dividends come into the picture. CAIM’s report, “What Women Want: Understanding the Modern Female Investor,” provides a comprehensive foundation for women to seek out high-quality dividend stocks as a major portion of their investment strategy. According to CAIM’s research, women prefer lower risk investment options that are easy to understand.

Just as their name suggests, dividends are stocks that pay you, the investor, a dividend or income stream, while you wait for your stocks to grow. Dividend-paying stocks are an opportunity for women in particular to keep up with inflation and enjoy a cushion when stocks are out of favor.

Women benefit from this strategy in three ways. Dividend-paying stocks offer:

1. Growth of principal to outperform the markets over a long term period of time.
2. A steady stream of income to meet current inflation rates and a cushion (the quarterly dividend payment) to help your portfolio grow even during bear markets.
3. Peace of mind to the investor. Statistics show that women are more afraid of risk than men. Dividend-paying stocks offer women the security of buying financially stable companies that offer a payment to cushion their portfolios in volatile market conditions and even increase in value during periods of economic expansion.

The Proof is in the Studies
A couple of solid studies prove the long-term success of dividend-paying stocks.  

A recent Barron’s study called “10 for the Money” notes that over a 20-year period, dividend stocks often outpace the market on a risk adjusted basis, offering stable earnings and dividends investors can count on more than capital gains or price appreciation. Also, while they don’t rise as much in whiplash rallies, they also go down less when the market buckles.

There’s also the potentials of dividend reinvestment. In his 2003 article “Dividends and the Three Dwarves,” published in the Financial Analysts Journal, Robert Arnott concludes that, over a 200-year period prior to 2002, reinvested dividends were far and away the main source of real returns from stocks. In fact, of the 7.9 percent return in stocks, 5 percent came from reinvested dividends, 1.4 percent  from inflation, and only 0.6 percent from rising valuation levels and 0.8 percent from growth in dividends.   

Finally, evidence uncovered by Elroy Dimson, Paul Marsh, and Mike Staunton in their book, The Triumph of the Optimists: 101 Years of Global Investment Returns, found that a stock portfolio with reinvested dividends over a 101-year period would have generated nearly 85 times the wealth generated by the same type of portfolio focusing solely on capital gains. Now, that’s some serious earnings!

Ask and Ye Shall Receive
Perhaps the most important point to make here is that women, in general, tend to be unaware of the options available to them when it comes to finances. This is mainly because they often do not know the kinds of questions to ask. According to our survey, only 32% of women were familiar with dividend-paying stocks. Dividend-paying stocks are worth asking about. We believe in taking a much longer-term approach to dividend investing. As an example, we have provided a brief analysis of a selection of dividend stocks and their performance compared to the Standard & Poor’s 500 index over a 10-year (8/2000-8/2010) and 20-year (8/1990-8/2010) period of time. Our “mock” portfolio includes McDonald’s (MCD), Chevron (CVX), Emerson Electric (EMR), Johnson & Johnson (JNJ), and Coca-Cola (KO). In a 10-year time frame, four of these five companies’ stocks were up double digits (KO was up just eight percent during the period), while the S&P 500 was down 26 percent in the same time frame. Over a 20-year period, while all of these stocks and indices were up triple digits, each of our random sampling dividend stocks beat the S&P 500 handily, with MCD more than tripling the return of the S&P 500 during the last 20 years.

At the same time, all of these companies in our mock portfolio have increased their dividend 10 times in the past year, with double-digit dividend growth rates over the past five years.  In summation, not only did these stocks outperform the S&P 500 index over a long period of time, these high-quality, well-capitalized companies were also able to increase their dividends at the same time.  

Hence, growth plus income.

Catherine Avery is a member of the DailyWorth Connect program. Read more about the program here.

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