When it comes to long term investing, I believe that you should focus more on dividend yileds versus speculation and share price appreciation. While this might mean avoiding sexy names like Apple and Google, there is nothing unsexy about constant cash flow with regards to your assets.
When it comes to sustainable investment income, dividend payments are much more stable than share price and capital gains. While dividend payments can be cut by companies that are in trouble as in recent years, it is a rare thing and most companies do everything possible to avoid a dividend cut. Even with dividend cuts from a select few companies (namely financials) over the past few years, you still fared better than the overall drop in share price.
Additionally, dividend payments historically tend to increase along with inflation, making it an inflation protected income. In an inflationary environment, businesses pass on the costs to their end consumers which results in comparable growth in revenues and profits. This allows companies to continue to increase the dividend payment along with inflation.
If you focus on dividend yields, you will be much more likely to buy stocks at very depressed prices (which is when you should buy them), because you will see a higher yield. When you’re focused on share price, you will tend to avoid the stocks because of a falling share price. When it comes to long term, cash flow focused investing, share price fluctuation means nothing; so maximize lower share prices and lock in high yields for years to come by buying stocks low.
Because we’re buying a cash flow from dividend stocks, what are we actually buying for the non-dividend stocks? Well, you’re buying the opportunity of selling the stock at a higher price than you bought it (hopefully). Because you aren’t earning any cash flow from the position, the only way you can make money from the position is to sell the stock at a higher price than which you bought it. This requires effective trading skills and/or sound forecasting. Most individuals investors lack both.
It is very hard to earn profits on non-dividend stocks for the reasons I just shared. As such, focus on high dividend stocks over a long term. Instead of trying to build up the overall balance of your equities account, build up the monthly or quarterly income of your portfolio from your dividend stocks. By tracking the income growth of your portfolio, you can also make projections on if and when you can live off your investment income.
For an example dividend portfolio, check out the Dogs of the Dow, a portfolio that attempts to invest in the highest yielding Dow components each year. This is a great starting point for new investors.
If you like this article, please sign up for free weekly email updates.
I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
In accordance with FTC guidelines, I state that I have a financial relationship with companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.
Any references to third party products, rates, or websites are subject to change without notice. I do my best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.