May 7, 2010
When picking a stock to add to your portfolio there are several things to consider: the strength of the company, the market share of the company, their level of innovation. What lies ahead for their sector of the economy? Do they have any big law suits pending against them? The list goes on from there .
One aspect just as important as those listed above is the company's dividend, and the history of dividend payments. We can think of a dividend as the shareholders reward for being an owner in the company. Now obviously all things equal, a stock that pays a dividend is a better investment choice than one that doesn't. But let's look a little deeper than that.
Between January 31st 1972 and November 30th 2009, S&P 500 stocks that did not pay a dividend averaged a return of 1.17% per year. If you had invested $10k in 1972 in the non-dividend paying sector of the S&P 500 it would be worth about $19k 38 years later. On the other hand, if you had invested that $10k in the consistent-dividend-paying stocks sector of the S&P 500 during that same 38-year period, it would be worth about $140,000. Quite a difference! Let's take it one step further: if you put that $10k to work in the dividend growers and initiators sector of the S&P 500 it would be worth about $288,000.
Obviously dividends can make for a nice income when you're drawing cash out during retirement, but they shouldn't be ignored when you're still working and saving money for the future. Find some solid dividend-paying stocks, reinvest the dividends and let them go to work for you. The power of a good dividend can pay big 'dividends' in the long run.
Numbers provided by Franklin Templeton Investments