Fearful Dividend Investors seem to be forgetting something that’s really important for dividend growth investing strategies.
They forget that it’s the power of dividend growth that matters most to building long term wealth, not rising interest rates!
Yes dividend stocks have taken a shit-kicking lately, but I believe this will be temporary and the bargain prices that some stocks are trading at represent a huge buying opportunity. This is especially the case if you’re just starting out in the world of dividend investing.
So let’s review why people follow the dividend growth investing strategy:
1. Dividend Stocks Provide Passive Income!
First off, people like to see a return on their investment and by investing in dividend stocks, they see money coming in every quarter. The more they invest in these stocks, the more this passive income grows and grows. Some of dividend investors aggressively buy these stocks with the intention of one day retiring and living off the dividends!
2. Great Dividend Stocks Regularly Increase their Payout!
The second important reason people buy dividend growth stocks is that, as the name suggests, great companies grow their dividends over time. So if, for example, you buy one of these stocks yielding 3-4%, that yield typically rises every year as companies increase their dividend payouts.
Every year, the companies I own regularly increase their dividends. Don’t believe me? Just check out my monthly Passive income reports. They typically increase their payout by 5-10%. So this means that even if I stop buying these dividend stocks, my annual dividend income will continue to grow. This is precisely what makes dividend investing such a powerful investing strategy.
3. Dividend Stocks Have Tax Advantages!
The third important feature of dividend investing is that if it’s done outside of a tax-sheltered account, the dividend income is taxed at a far lower rate than other kinds of investment income like rental income or interest on a savings account or bond.
Don’t Fear Dividend Stocks!
So why are people selling their dividend stocks today? Well, it’s the fear of rising interest rates that’s to blame. 10 year bond yields in the US are a bit above 3%, while in Canada they’re about 2.5%. These yields are still below some great blue chip dividend stocks like Canada banks, telecom, utilities and pipelines, as well as some blue chip consumer staples in the US like Procter & Gamble.
Sure the yields may rise a bit more, but I don’t believe they’ll be going to 10% or anything crazy. So I believe that same solid blue chip dividend growth stocks that I’ve been buying for a decade are still worth investing in over the long term. The dividends they pay will still grow faster than interest rates rise.
There will always be market risks with owning stocks, but I think if you’re investing for the long term you’ll make out just fine. Besides, I’ve never met someone who became rich by investing in bonds or savings accounts. But I have met people who became rich over time by investing in solid blue chip dividend stocks.
So my approach will continue to be buying my dividend stocks. The best time to invest has always been when there’s a lot of fear in the market. Sure I might take a short term hit, like I did back in 2008-2009, but in the long term I’ll make out like a bandit.