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Dividends: Forgotten in the rush for capital growth November 8, 2012

Posted by shaferfinancial in Finance.
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I’ve posted on this story at this blog, but I met a couple of Coca-Cola millionaires while in college that were living off of dividends from stock bought by their parents. The story of dividends was totally forgotten by me for years, even though I had a finance prof who drilled the importance of dividends in security analysis into my brain.

There are a class of well run businesses, that have been ongoing operations for generations, that pay an increasing amount of dividends year after year. These dividend aristocrats, as they are called, are easy to discover. They are large companies with a variety of products that they sell around the globe.

Even more interesting is most of these companies have never decreased the amount of dividends they pay even in recessions.

Somewhere along the line, I forgot all about them. So, even though their stock value can have large amounts of variation, their dividends do not. And the overall long term increase in value is represented by an increasing dividend payment. In short, I discovered I was looking at the wrong piece of the puzzle. Instead of looking at stock price, I should be looking at dividends.

And even more importantly, by doing this one doesn’t have to worry about selling the stock to get income, only about collecting dividend checks in retirement. Remarkable really when you think about it. We have really been mislead by the stock salesmen haven’t we?

It’s easy to think you could find a dozen [less for me because I really don't worry about diversifying with the companies I deal with] dividend aristocrats that you could delve into the financials enough to actually understand the businesses. Now some of you might think that owning 3 dividend producing stocks like I do is risky and that is OK. You can diversify as much as you like, but just remember the more you own, the lower the likely dividend checks are going to be because you are moving down your list of great dividend companies to own. The point is by researching and implementing this strategy you can avoid the known issues with mutual funds.

So the 4th discovery I made was dividend producing stocks deliver a much higher future income than growth stocks.

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Comments»

1. gregturn - November 8, 2012

I like plans where you get out of the “sell a piece of your portfolio to get money” mentality. Rent yielding real estate, dividend yielding stocks, and borrowing tax free from an EIUL all make for better plans than selling a chunk of your mutual fund, and praying you don’t take a hit within 5 years of retirement.


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