Dividend Paying Stocks
There are many ways to invest in the markets, including growth stocks, momentum trading, value investing, and more. Each strategy has its own appeal, but we believe dividend-paying stocks are an effective and solid choice for most retail investors. Many who previously pursued other strategies—often facing challenges or even losses—are now turning to the stability and reliability offered by dividend-paying stocks.
Active Trading
In the Philippine stock market, many retail investors use active trading strategies, often depending on charts and patterns. While this approach can work well—many traders worldwide have made good money with it—it is also hard to master. Success in active trading takes years of hard work, and basic chart reading isn’t enough. Also, many successful traders keep their secrets to themselves, and the strategies that work are often not available to regular investors. Successful active traders usually work in big companies, where they have access to a lot more information. In short, active trading is tough for retail investors to do successfully.
Speculative and High Growth Investing
The most alluring dream for many investors is achieving massive gains in a short period. This aspiration often leads us to speculate, trying to predict which stock will be the next big winner. Sometimes, we focus on identifying companies poised for rapid growth in the coming years.
This excitement often draws us to stocks surrounded by significant hype. While these investments sometimes pay off, the problem is that the hype is often already reflected in the stock’s price. This usually means the stock is expensive, having already factored in anticipated growth. As we’ve learned from value investing, this can backfire, resulting in losses. Even if we occasionally hit a big win, picking the wrong stocks can disrupt our path to building wealth through compounding.
Dividend Stocks
Dividend stocks are companies that have matured to a stable level. They continue to grow, but also produce extra cash annually, part of which is paid out as dividends to shareholders. A dividend stock typically shows financial stability through years of consistent and ideally increasing dividends. While not as fast-growing as growth stocks, these companies can still increase their dividends each year. For simplicity, we look for stocks with a dividend yield of at least 3%, similar to the yields from safer investments like treasuries.
Dividends are often overlooked because they typically offer returns between just 3-5%. However, this seemingly modest yield hides significant advantages. These returns come with benefits that retail investors can appreciate, offering unique merits that enhance investment strategies beyond face value.
Advantages of Focusing on Dividend Stocks
Catch Fundamentally Sound Companies
Many people overlook that a key part of stock investing is the process of elimination. Not every company is worth the time to research. By focusing on dividend stocks, we can narrow our options to businesses more likely to be fundamentally sound. Since dividends are paid from excess cash, companies that consistently provide them over the years are probably in profitable industries with stable business models. This approach helps us avoid financially troubled companies.
Easier Analysis
Dividend stocks are easier to analyze because they give clear signs of a company’s health. Companies that pay regular dividends often have stable earnings and cash flow, making it simpler to judge how strong and profitable they are. This makes evaluating dividend stocks more straightforward than assessing other stocks with less predictable performance. Predictability is the investor’s friend.
Long-Term Mindset
Focusing on increasing your annual dividends fosters a long-term mindset that encourages patience and commitment. Watching your dividends grow each year provides emotional reinforcement, motivating you to continue this investment strategy for the long haul. The ultimate goal is to achieve financial freedom, where you can comfortably live off your dividends alone when the time is right. This approach helps keep your financial objectives clear and inspires a consistent investing discipline.
Commit Larger Capital
While other trading or investing strategies can be effective, we often experience subconscious hesitation to commit larger amounts of capital. However, as we gain experience and see our annual dividend income increase, our confidence grows. This growing assurance encourages us to invest more money, knowing that our strategy is working and our understanding of the market is deepening. The more capital we have working for us, the faster we can achieve financial freedom.
Dividends as Safety Net
In stock investing, there’s a lesser-known risk called value traps. These occur when we purchase stocks at a seemingly good price, yet the market doesn’t recognize their value for a long time, causing the price to stagnate. This is more common in smaller markets with lower trading volumes, like the Philippine Stock Exchange. Dividends provide a safety net by ensuring that we receive payments while waiting for potential capital gains. If we’ve invested in stocks with increasing dividends, getting stuck in a value trap becomes less likely because such stocks remain attractive to investors who favor regular income from dividends.
Emotional Rewards
Seeing our investments grow and produce more each year provides significant emotional reinforcement. It simply feels good. When we factor in compounding, the increasing dividends become more meaningful, rewarding us for our efforts and sacrifices. The delayed gratification of saving money to invest is worth it when we start receiving returns in the form of dividends. This emotional reward reinforces our commitment to the investment journey, making each step feel even more valuable.
