It is often said that grandchildren are life’s dividends. But you don’t have to wait until you become a grandparent to reap dividends – if you are a savvy investor.
First – let me define a dividend. A dividend is a reward given to a corporation’s shareholders for owning their stock. This is a two-way street as dividends are also a great way for companies to attract investors to buy their stock.
When developing a diversified portfolio for my clients at OnCenter Financial Advisors, I often recommend including ETFs (Exchanged Traded Funds) that invest in dividend paying stocks because dividends provide investors with a steady payment of income, (usually quarterly, semi-annually or yearly) and also give them the opportunity to reinvest their dividends to purchase more shares of stock in that company. If reinvested, it allows you to earn dividends on your dividends – thus achieving the wonderful benefits of compounding. As an added benefit, the dividend also plays a powerful role in increasing the total return of your investment.
Only large, financially strong companies are able to pay dividends, so dividend-paying companies typically represent lower risk investments. Further, because they are strong companies, their stock prices steadily increase over time.
It appears I join some illustrious company in favoring dividend-paying stocks – to quote John D. Rockefeller, the founder of Standard Oil Company, a behemoth that was at the top of the oil industry, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
- The term “dividend” derives from the Latin term dividendum, or “thing to be divided.” In other words, companies divide their profits up among shareholders.
- Companies have been paying dividends to shareholders for over 400 years. The first company to ever pay a dividend was the Dutch East India Company in the early 1600s.
- Dividends alone have accounted for over 40% of the S&P 500’s total returns since 1929.