Why Young Investors Should Love Dividend Stocks
More mature companies in more stable industries tend to pay dividends. Some might think that a younger investor would benefit more by owning smaller, more rapidly growing companies. And, yes, younger investors should have some of their investment funds in rapidly growing companies, although they are often riskier (think early stage biotech or social media.)
Aside from the well known benefits of owning dividend stocks; less volatility, total return from income and growth, and cash flow in times of market weakness, there is an important advantage for younger investors.
Many companies have a history of raising their dividend annually and many others raise their dividend almost every year. (Most industries go through cyclical downturns causing the suspension of the dividend hike for that period.)
The dividend yield on most of our best dividend paying stocks at their current prices generally ranges between 2-3%. If dividends rise on average only 3% per year the dividend will double in 24 years, becoming a 4-6% dividend yield on today’s prices. (A 4% per year increase doubles in 18 years.) If dividends are reinvested over the years the compounding effect is even greater.
As we get closer to retirement we want to be sure our investments provide us the income we need. Allocating a significant portion of our retirement investments to dividend raising stocks during our working years can go a long way towards providing adequate retirement income.