Investing in stocks is mainly beneficial for long-term investors, and while selecting stocks, dividend and growth aspects of equities, are the essential part of investment decisions. Sometimes, it is not possible to choose an investment that gives you both.
However, picking stocks based on high dividend yield is a traditional technique used by investors. It is necessary to understand that only a high dividend yield is not a criterion to invest in stocks.
The growth aspect, the company’s management, and most importantly, the company’s long-term vision are essential to look at before investing. Keeping the growth mind-set of the company in mind, there are two aspects of a high-dividend yield company:
- Positive- The company is performing well enough to distribute its profit proportions as dividends to the shareholders.
- Negative- To keep their shareholders happy, the company is paying a dividend instead of reinvesting it in the growth of the company.
Negative aspects of high-dividend-yield companies can be avoided by conducting in-depth research on the financials of the company. Keeping the positives of the high-yielding companies, let’s understand why dividend-based companies are a better investment for your long-term financial objectives.
Magic of compounding
The first and foremost benefit of investing in such companies is the compounding effect. Your principal amount is compounding growth as per the growth rate of the company, but if you reinvest the dividend you have received, it will also give you compounding returns corresponding to the company’s growth.
By investing your money in a high-dividend-yielding company for a longer period of time, you can have a great source of passive income in the form of dividends. Your long-term financial objective, like retirement planning, can be achieved through investing in such companies.
Contained less risk
High-dividend yield companies are most likely to be mature companies, which do not generally go to bankruptcy. On the other hand, growth-centric companies belong to a growing level of business life cycle and they are also taking risks to make their business successful. If you are planning for a long-term investment and do not have the risk appetite of losing your money in growth-based companies, dividend yield companies are best to invest in.
Dividend yield stocks are more likely to give stable returns as these stocks majorly belong to large-cap stocks. These stocks are mature in the industry, hence, helping you in giving stable returns while not affecting your portfolio due to volatility in the economy. Financial issues in companies like capital crunch, funding winters, and cash burns, do not affect large-cap companies, due to which they are able to give their shareholders a stable return.
Inflation is rising continually while creating an upward trend. Investing in high dividend-yield companies lets you avail yourself of the dual benefits of capital appreciation and dividend income. You can beat inflation effectively by investing in these companies and by the benefits of compounding effects.
For the purpose of achieving long-term financial goals like retirement planning, or any objective that has to be achieved after 5 years, high-dividend stocks are the best traditional way in the modern world too.
Wealth accumulation, inflation hedge, and the magic of compounding as some of their beneficial components due to which these companies have gained traction for a longer period of time.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com