John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
Rockefeller knew a thing or two about wealth and getting rich. According to Harvard Business School professor Tom Nicholas and Stanford political science professor Vasiliki Fouka, “Rockefeller’s estimated $1.4 billion net worth in 1937 was equivalent to 1.5% of U.S. GDP. According to this metric he was (and still is) the richest individual in American business and economic history.” Clearly, dividend income was important to him. Here are some reasons they should be important to you, too.
1. You get income without selling stocks
One way to get income out of the stocks in your portfolio is to routinely sell some of them. With dividend-paying stocks, though, you can get income without selling any shares! Much depends on the size of your portfolio and the overall average dividend yield it sports: If you have a portfolio worth $500,000 and an overall dividend yield of just 2.5%, you can expect $12,500 in annual income — just over $1,000 per month.
2. Dividends tend to grow over time
Better still, dividends from healthy and growing companies tend to be increased over time — often annually. Walgreens Boots Alliance (NASDAQ:WBA), for example, has upped its payout by around 10% annually over the past decade, and that’s not such an unusual rate. There are dozens of “Dividend Kings” — companies that have increased their dividends for at least the last 50 consecutive years. Even more numerous are Dividend Aristocrats, with a 25-year increase record.
3. Dividends can help you beat inflation
Many people underestimate the degree to which inflation can screw up their retirement. The long-term average annual rate of inflation is around 3%, and that alone can cut the purchasing power of your savings by half or more over 25 years. If you’re on a truly fixed income, for example, collecting $50,000 annually, in 25 years that $50,000 will be worth only about $25,000.
Dividends to the rescue! If inflation continues to average 3% throughout your financial life, and your dividend payouts increase by an annual average of 3% or more, you should be able to keep up with or even beat inflation. Many, many companies increase their payouts by 5% or more, on average, per year.
4. Stocks should grow over time, too
Meanwhile, dividend-paying stocks offer wealth-building not just via dividends, but also via the stocks themselves. Sure, some stocks you invest in, dividend paying or not, may flame out or simply disappoint. But as long as you’re sticking mainly with solid companies — or with broad index funds featuring many dividend payers — you’ll likely see the value of your stock holdings rise over time. With some great growth stocks, the growth rates can be quite steep — over the last decade alone, for example, shares of Starbucks (NASDAQ:SBUX) have grown by an annual average of more than 20%. Costco (NASDAQ:COST) shares have averaged nearly 20% over the same period, too, while Microsoft (NASDAQ:MSFT) shares have averaged more than 28%.
5. Dividend payers are often more stable
Finally, dividend-paying stocks tend to be more stable and reliable than nonpayers. Why? Because their managements have grown the companies to a point where they are generating more income than they need to operate and grow, and they see that income as reliable enough that they commit to paying shareholders a dividend annually (typically via quarterly payments). No company wants to cut back, suspend, or eliminate its dividend, as that will upset shareholders, so dividend payouts are taken very seriously and generally expected to continue.
These are just some of the many reasons we should all love dividend-paying stocks. If you don’t have a bunch in your portfolio, look into adding some.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.