Why Do Dividends Matter?
He who understands it, earns it … he who doesn’t … pays it. ”
Here’s our strategy to consistently outperforming the market by more than 11% every year since we launched in 2011.
We operate by one simple mantra:
Buy reliable dividend paying stocks and re-invest the returns.
There’s no great secret, and we’re a bit puzzled why more people don’t do this. It’s not difficult and it has worked remarkably well for us over the years.
Private investors have a few options for investment strategy: the 3 most common being:
- Value Investing – buying shares which look cheaper than the underlying asset.
- Growth Investing – buying shares in a company which is expected to grow.
- Income Investing – buying shares in companies which pay great dividends.
One strategy isn’t necessarily better than another, but regardless of the number of grey hairs you have or your place in life, everyone can benefit from the passive income an Income Investing strategy offers.
Passive revenue makes Income Investing a good idea all on its own, however the real value for the long-term investor is when those dividends are reinvested, either through a DRIP (Dividend Re-Investment Plan) or simply by purchasing more shares on the market.
Then you have compounding returns where the dividend income is used to make more income.
To illustrate the awesome power of compounding returns look at this graph:
By starting with £100 and getting a 6% return (pretty easy to achieve - see below) you will have doubled your initial investment within 12 years.
However if you taking out the dividends it will be a further 5 years (or 42% longer) before you reach that level.
Things get much more interesting beyond these timescales. If we project out further:
Here you can see where compounding returns really shines, as you achieve almost 6 times your initial investment after 30 years, and over 10 times after 40 years.
This supposes one dividend payment per year, most companies pay more regularly which would shorten the time-frame to achieve this growth.
Also we’re not taking into account the capital growth you would expect to see from the value of the holding too which further boosts the value of your investment.
All this means that a simple long-term strategy of buying good dividend paying stocks represents an excellent way to growth your wealth.
Achieving a consistent 6% year-on-year growth is relatively straight-forward, looking at the returns we’ve achieved on the DividendMax Trading Portfolio you can see in our worst year our growth was 6.6% and our best performance a whopping 41.3% annual return:
* The FTSE 100 Total Return Index is an index of the performance of the FTSE 100 with dividends reinvested.
This performance is achieved by selecting stocks which are promising good dividend payments in the coming 12 to 18 months which represent an excellent opportunity based on the current share price.
For example, say a company is about to pay its final dividend, and we’re also expecting their interim in another 6 months, and their final dividend in 13 months, for a total yield of 12%.
We would purchase the share and soon receive the first dividend, then as the share price moves up and within a few months we get our 12% increase earlier than the 13 months.
At that point it may be wise to sell that stock, forgo the other dividends and pocket the gain. Then with the proceeds invest in another stock promising good dividends.
With this strategy we are always swapping between stocks and collecting dividends along the way.
This has enabled us to grow our portfolio by 161% since September 2011 (performance current as at 29 March 2020).
All the information you need to mimic this strategy is available freely on the internet, you don’t need to pay an advisor or buy any products (including ours) to do this.
However you do need to follow many companies to figure out what their dividend yield is likely to be, what their current share price is and identify the best time to buy and sell.
So to make this process easier we built the OptimizerMax tool.
All the donkey work of keeping up-to-date with company announcements, researching the market and estimating dividends is already done.
On top of our dividend projections the OptimizerMax tool highlights the best yields and identifies good opportunities to buy shares.
The tool can be customised to select companies with a good history of consistent dividend increases, greater cover (cash available to pay dividends) and other criteria. This gives you the control to ensure you see only quality companies.
Importantly OptimizerMax also tell you the profit you will likely make and by what date, i.e. a buy and sell date.
Additionally we provide a portfolio management tool called GeneratorMax which allows you to follow the performance of your investments and plan the income from each holding.
You can experience the full suite of DividendMax tools and content for free on a 30-day trial basis:
— Interested in a free trial? —