As a dividend investor, your patience is going to be tested. There will be times when you question your strategy. Is dividend investing worth it? When your friend’s growth stock investment is up 75% on the year and your dividend-paying stock has only seen 4% earnings per share (EPS) growth, it can be frustrating. You might even consider selling your shares and trying to reinvest in something more immediately profitable.
It’s a trap many investors fall into. The dividend investing strategy is a long game—one that takes decades to mature. And while it’s true growth investors may profit right now, they rarely profit to the level of a dedicated dividend investor when all is said and done.
Context is Everything
Fear of missing out (FOMO) is a powerful psychological trick our brain plays on us. We tend to see others’ successes as our failures, and we make impulsive decisions because of it. Your friend’s winning stock isn’t one you normally would’ve invested in, but because it’s been a huge success, you might be tempted to invest in the next one he recommends.
The problem with this, is that more people lose than win. The stock market is unpredictable! There’s no certainty that a stock will shoot up 75% in a year. It could just as easily fall 75%.
Dividend investing is less of a gamble and more of a structured investment because it relies on history and proven figures to influence decisions. You might look at a company paying a 2.1% dividend and see that this company has paid that same dividend for 20 years! Or, they might have a history of increasing their dividend.
If you find yourself asking “are dividend stocks a good investment?” be sure to look at them in context. Your friend’s growth stock might have a year of booming growth, yet have minimal (or no earnings), while your dividend stock has decades of proven dividends and a strong record for positive free cash flow. Stability and predictability matter.
The Long-Term Mindset
If you can’t shake the feeling of FOMO, or keep eyeballing the immediate returns of a growth stock, consider your mindset. It’s not a bad thing to invest in growth stocks over dividend stocks, but if your time horizon is long (decades), you need to seriously consider the prospects for your investments over that time.
Few growth stocks have the energy to keep growing at a rapid pace for more than a few years. And, a lot can happen after they balance out. They might be acquired by a bigger player. Or, they might stagnate. Sometimes they regress and tumble a bit. But more often than not they have rollercoaster quarters—the stock price goes up and down based on key metrics in their quarterly reports. Very few actually become dividend-paying stalwarts.
When you choose dividend investing, you’re choosing a company that’s already gone through all of this tumult. Dividend paying companies are (for the most part) stable and reliable. Their share price fluctuates little and they’re less subject to swings in their quarterly reports. True, they might not grow double-digit percentages each year. But they will likely match the upward trajectory of a major index like the S&P 500.
Which would you rather have over the long term: An up-and-down stock that adds volatility to your portfolio, or a slow and steady riser that continually rewards you for being a shareholder?
Is it Worth Investing in Dividend Stocks?
All you need to answer this question is a simple dividend investing calculator. Plugging the numbers of your dividend stock investment into our calculator will give you a long-term picture of your dividend returns!
Your growth investing friends might be seeing their 75% return now, but you’ve got the benefit of compound interest on your side! And while their growth stocks will face ups and downs in the coming years, your dividend-payers will chug along, generating positive returns that continually compound in the form of share purchases and, someday, passive income.
FOMO is a natural trick of the brain and can cause you to make bad decisions. Being a dividend investor means fighting this feeling with facts and logic. It’s not always easy to look ahead and keep your long-term outlook top of mind, but rooting yourself in the stability of dividends can help you feel better about the decisions you’re making.
There will always be stocks that take off and generate huge gains. You can’t catch them all! In fact, it’s better not to try. As the old saying goes, “time in the market beats timing the market.”