What can you do this week?

• Dividend paying investments provide growth and income and are already part of many broad indexes like the S&P 500.

• You can get exposure to dividend growth and high yielding stocks in a diversified exchange traded fund that tracks these indexes.

• While reinvested dividends absolutely can contribute to the compound growth in investment values over time, it’s not a great strategy for growing income now that can help you grow wealth.

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What is a Dividend?

Per Investopedia:

“A cash dividend is the distribution of funds or money paid to stockholders generally as part of the corporation's current earnings or accumulated profits.

Cash dividends are paid directly in money, as opposed to being paid as a stock dividend or other form of value.”

• Dividends can be used how you choose as the owner of the stock so in theory, can be spent like an extra income source.

• It could also be used to reinvest in other opportunities for growth.

• Usually they are paid quarterly but some pay monthly.

  

  Get the cliff notes on X.

Dividend Growth vs. Yield

• Some stocks payout a high current yield (5% or more as an example) while others pay lower current yield (1% or less as an example) but are growing their dividend.

• Pieces like this one from Investopedia provide more detail on the two.

• While taking the higher income now means you can allocate more current income to either spending now, reinvestment into the same stock, or redirect to higher potential strategies, you may be missing the forest for the trees.

• Becoming too focused on capturing the most yield now can mean you miss sometimes double-digit compounding of the dividend with dividend growth companies.

• The larger question beyond dividend growth is to ask what is happening to your principal value. High yielding and dividend growth companies are known to lag the broader market and for years at a time. While income now is attractive and growing income for later is attractive too, the opportunity cost of missed returns is a real risk to this strategy.

Capital Appreciation vs. Dividend Income

• It’s no secret the best dividend paying companies usually have strong cash flows and profitable operations in order to pay dividends that increase over time.

• That implies they have an established business operating history. That also means they are likely in the mature stage of their business growth.

• This is the antithesis of a startup or a company dedicated to growth, investing their available cash in growing their business vs. distributing to shareholders.

• While dividends can be reinvested and this compounds over time, we all know the high flyer stocks that become 10 baggers are rarely if ever dividend payers.

• Again, spreading your risk across thousands of companies means you get the benefit of both characteristics without too heavily skewing your allocation to one.