Dividend investing is one of the most misunderstood investment strategies out there. Yet various studies have proven that quality dividend growth stocks tend to outperform the broad market indices over time. Companies exist for the benefit of shareholders, which mean that they have to generate some return either in the form of dividends or in the form of capital gains. Paying a dividend instills discipline on management to be careful with the cash position and not take excessive risks such as ill-timed acquisitions or investing in projects which might not generate sufficient returns for the company. Investing should be all about the middle ground, and not excessive assumptions about relying exclusively on capital gains or exclusively on dividends. Everything is good in moderation, and investing should not be any different.
Dividend investors realize that focusing just on the dividend income is not preferred. In order to be able to pay the dividend, a company needs to have a sustainable income stream, which preferably could grow over time. This would support a growing dividend over time. A growing stream of earnings also means that unless an unjustifiably high price was paid for the stock, its price should rise over time as well. By reinvesting dividends into purchasing more shares, and by enjoying capital gains in the process, investors will be able to take full advantage of the power of compounding, which will help them in achieving higher net worths over time.
Source: InvestorPlace
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