Over the decades, I have seen friends, relatives, and acquaintances lose their entire investment portfolios due to stock market crashes. Some of these folks, along with many, many other investors, gave in to fear and sold at the worst time in the markets. In truth, the human nature pushes most investors to follow the greed to buy high and succumb to fear and sell low.
If you need some proof that investors will almost always buy at the wrong time, consider the ARK Investments ETFs. Investors piled into the Cathie Wood-managed ETFs after ARK’s flagship fund, ARK Innovation ETF (ARKK), gained 152% in 2020. Ark funds under management increased by 900% in 2021. For all that newly invested money, ARKK peaked in February and is now down 24% from that high. Individual investors piled into these funds just before the peak and are now facing significant losses in ETFs they thought would make them rich.
It was stories like these that made me realize that to succeed as a long-term investor, a different approach was necessary. My stock market strategies focus on letting dividend income make up the most significant portion of our expected returns.
Here are 10 reasons to love dividend stock investing:
- Dividends are more predictable than share prices. While they are not guaranteed, many companies and dividend-focused funds pay very predictable dividends. You can build a dividend income that can be counted on to repeat quarter after quarter, year after year.
- Dividends are cash returns on your investment. The cash shows up in your brokerage account, and that money is yours. Compare that to share prices, where any gains you have in a stock can quickly disappear if the market turns down.
- Dividend income lets you tap the tremendous power of compound growth. Reinvesting dividends will increase your holdings by adding shares and growing your income stream as those added shares also pay dividends.
- The major stock brokerage firms let you set up automatic dividend reinvestment for most income stocks. Automatic reinvestment allows you painlessly tap the power of compound growth.
- Dividend income easily becomes retirement income. There is no need to sell shares, possibly at the worst time, to fund your retirement lifestyle.
- Investing for dividend income means you don’t have to monitor your portfolio value constantly. Investment changes in an income-focused portfolio are a rare occurrence. As long as the expectation of continued dividends remains valid, you buy and hold and then earn income.
- Investing for dividend income makes it easier to buy low when other investors are selling in fear. Income stocks that go “on-sale” have excellent yields, and you lock in those yields if you buy during stock market downturns.
- As an income-focused investor, it is easy to track your results and measure your strategy’s success. Record and add your dividend income every quarter. If it is stable to growing, your plan works, no matter what is happening with share prices.
- Get better sleep. Imagine not worrying about your investment portfolio.
- You can earn more than you think and more than traditional financial advisors even know. My Dividend Hunter recommendations list sports an average yield of about 8%. Surprisingly, through all the markets and economy has been through for the last eight years, the recommendations average yield has stayed very close to 8%. Remember, that’s an average of 8% per real cash into your brokerage account, even during many years with tremendous volatility in the actual annual returns.