Posted on | February 22, 2013 | Comments Off
Dividend refers to the cash payout made by a company to its shareholders. Since a company is a profit-generating enterprise, paying out dividend is one way a company can share its profits with its shareholders, who are part owners of the company. For shareholders, investing in a company that pays regular dividend is comparable, and sometimes preferable, to buying bonds or fixed deposits. It is therefore no surprise that a lot of investors try to invest using one or the other dividend stock strategies. Let us find out how the different strategies fare in the long term.
Investing in High Dividend Stocks
Stocks that pay out dividend at a high rate, around 3%, are preferred by people who expect an income from their investment, and want as high income as possible. There are a number of challenges when you want to find companies that pay a regular and high dividend. You have to look at the company’s history to see its record of dividend payments. Normally, it is seen that established companies such as utilities pay out regular dividends to their stock holders. Utilities such as power and water
However, there are many blue chip companies that pay out regular dividend. Johnson & Johnson is one example of a large blue chip company that pays out a dividend of more than 3%. There are also some very popular mutual funds that focus just on high dividend stocks. One example is SPDR S&P Dividend ETF, which is invests only in high divided stocks, and currently owns assets worth about $10 billion.
Cashing out or Reinvesting
Once you follow a dividend investing strategy, you have to decide whether you want to reinvest your payments, or cash out. If you are a retiree who is living on his stocks income, then you would not be interested in reinvesting your dividend payouts. However, if you want to grow your portfolio with time, you can keep reinvesting your payouts in the same company, or even invest them in some growth company. This way your dividends can fund help grow your portfolio.
Dividend Investing Vs. Value Investing
Investing for dividends is one type of investment strategy, and it can be contrasted with value investing, in which we look at the future prospects of a company rather than its current dividend. It should be noted that the biggest proponent of value investing is Warren Buffet, and his company, Berkshire Hathaway, has never paid a single dividend to its shareholders. Today, the main share of that company costs around $70,000, which should tell us that value investing is not a bad strategy to follow in the long run.
However, when you want current returns on your investment, you should follow one or the other dividend stock strategies mentioned here. Dividend paying companies pay out dividend because they do not need that money to fund their growth, or are at a plateau as far as growth is concerned. When choosing high dividend paying companies, you should pick up companies that have a stable business model that would not be interrupted in the future.