Dividend-related Investing in Tough Economic Times

I had a friend ask me on how they should spend money in the stock market with its recent ups and downs. Although I cannot give exact recommendations for which companies to invest in, here is some information on one investment strategy for those who are looking for deals in the stock market and can afford to invest.

On the one hand, it is reasonable to think that public companies should take the capital they raise from selling stock and reinvest it back entirely.

However, the reality is that a significant portion of that money often ends up as waste due to failed business decisions such as unsuccessful product launches, bad acquisitions etc’. On the other hand, businesses that consistently pay and increase their dividends through time are often regarded as more fiscally and operationally responsible than companies that don’t pay any dividends.

Companies that offer dividends are showing a level of confidence that their operations can meet financial goals, and confidence is the key attribute that investors look for, especially in turbulent economic times. Dividends also cannot be concocted by some accounting measure, which allows investors to conclude that the company’s earnings are legitimate.

Additionally, in most cases, companies cannot keep growing since any marketplace does have its limits. Therefore, instead of expanding into other non-related products and markets, it’s more worthwhile for a company to pay out dividends. All this is in keeping with the key for a long term success for a company, that of being able to balance the needs of shareholders, management, and the enterprise.

There is a general misconception about dividend stocks that they can be “boring” or simply don’t perform as well as non-dividend stocks. Ned Davis Research shows a good representation of how dividend paying stocks have outperformed non-dividend paying stocks over the past 35 years, which includes 4 prior recessions.

Combine this information with the fact that many stocks of high-quality dividend-paying companies have recently reached historically low prices and you may keep this in mind an investment strategy for the foreseeable future.