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The Importance of Dividends

The Importance of Dividends

February 28, 2022

Masonboro Advisors is an advocate for buying companies that pay dividends. 

Even more, we like companies that have a long track record for raising their dividends. 

Boring, you say? Let's briefly examine the strategy.

What are dividends?

Dividends are paid from company profits. This means that the company (no matter what industry it is) is making money. Dividends are real money that you can take and spend or reinvest. Either way, it is money in your pocket. 

Most investors live on the cash flow that their portfolio generates. They usually don't live on the portfolio's value unless they are willing to spend principal to support their lifestyle. 

Understanding dividends.

Usually, dividends are paid out on a company's common stock. A company can choose to pay out several types of dividends to its shareholders. These are the most common:  

  • Cash dividends: The most common type of dividend. Companies generally pay these in cash directly into the shareholder's brokerage account.
  • Stock dividends: Instead of paying cash, companies can also pay investors with additional shares of stock.
  • Special dividends: These payout on all shares of a company's common stock but don't recur like regular dividends. A company often issues a special dividend by distributing profits accumulated over several years and for which it has no immediate need.
  • Preferred dividends: Payouts issued to owners of preferred stock. Preferred stock is a type of stock that functions less like a stock and more like a bond. Dividends are usually paid quarterly, but dividends on preferred stock are generally fixed, unlike dividends on common stock.

Let's look at two $500,000 portfolios.

Portfolio A is worth $500,000 in year one, rises to $600,000 the next year, falls to $400,000 the following year, and by the end of the 10th year, it is valued at $800,000. Would you consider that a good investment? That is a 60% cumulative return or 6% a year over ten years. Not too bad. 

Portfolio B is a dividend-based model that pays $15,000 in year one, and the dividend grows by 5% per year for the next ten years. By year ten, the dividend has grown to $23,270. That is approximately a 55% increase in income. Over the ten years, the total dividend income amounted to $173,665. You could either spend or reinvest that money, whichever suited you. 

Now, guess what? They are the same portfolio. Even though the portfolio fluctuated in value over the ten-year period, the income rose steadily. The portfolio's total return (appreciation + gain) exceeded 11% per year. 

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Need to talk to some experts?

Many companies have raised dividends for 10+ consecutive years, and some have increased dividends for over 60 consecutive years. These are the companies that Masonboro Advisors uses to build income portfolios for our clients. In inflationary periods, a portfolio of increasing dividends can be "just what the doctor ordered!"

If you would like to learn more about the importance of dividends and how we can assist, please get in touch with us today! We have a reputation for educating individuals in an easy-to-understand manner so they can grasp personal finance and use those concepts to pursue their financial objectives.  

From investments to retirement planning to dividends, the processes and decisions can be overwhelming. No one strategy fits everyone, so every client gets our undivided attention. Our professionals are here for you and have over 140 years of combined experience. With over four decades of serving clients, we can help you address your needs of today and for many years to come. 

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