When Youth Pays Dividends
As the Persinos paterfamilias, I’ve been trying to get the youngsters of our clan more involved with personal investing. Many of you can perhaps sympathize that it’s a tough sell.
When a grandpa like me attempts to preach financial prudence to preceding generations, the typical result is the rolling of eyes. Hence today’s column, as a public service. Feel free to share this advice with the younger people in your midst.
Using youth for financial leverage…
I remain bullish about the stock market in the fourth quarter of this year, but considering the multitude of risks, you should at least get cautious and make sure your portfolio is hedged with safe havens. That’s why it makes sense now to increase your exposure to dividend stocks.
This asset class provides higher safety, but with plenty of growth and income. (Below, I steer you toward a list of our favorite dividend plays.)
The dividend-paying stock has long been a mainstay for those living on a fixed income. But these vehicles have been viewed as contrary to the temperament and long-term growth goals of young investors. After all, why invest in a stodgy utility when that money could be socked into shares of the latest high-flier?
The answer is that for every Alphabet (NSDQ: GOOGL) or Apple (NSDQ: APPL), there is a Pets.com, the poster child of the dot-com bust.
The coronavirus-induced stock market crash of February-March 2020 put a new shine on the stability offered by dividend-paying stocks. No longer just for the proverbial widows and orphans, dividend-paying stocks can be powerful tools for those at the start of their investing life.
Young investors can wield another tool that’s especially powerful when deployed early in life: compound interest (see chart).
The same logic that underpins investing in any retirement fund, namely that $1,000 will grow exponentially over the course of a few decades, applies to dividend investing. But dividend-paying stocks convey the added benefit of providing real income.
Previous market swoons (e.g., in 1987, 2000, 2008, and 2020) have delivered grim lessons that the capital appreciation gained from a rising stock price can evaporate should the market take a turn for the worse. A dividend is cash in the pocket. In turn, that money can be used to reinvest in the company through a dividend reinvestment program or to purchase other stocks.
Dividend-paying companies are generally more stable than their non-dividend paying peers. That’s because the dividend payment itself, particularly a growing dividend, is a strong indicator of a company’s future financial health in an era of opaque accounting practices.
Companies can fake earnings, but you can’t fake a dividend. A dividend is cold hard cash. Companies have to pay it out and they can’t pay it with money they don’t have. That’s the beauty of a dividend. It’s real.
But how do young profit seekers choose a dividend-paying stock? They should start by taking the long view. If you’re investing for income, your focus should always be on the health of the underlying business. The best dividend stocks are the ones that are in good shape and growing, so they can maintain and raise their payouts.
Over time, stock prices will follow those dividends higher, so you’ll also pocket capital gains by buying and holding. This approach also leads to less-frequent trading, which cuts your brokerage fees.
Keep it simple…
From personal experience with the youngsters in my family, even the most compelling argument can fall upon deaf ears. The real decision facing youth isn’t whether to invest in a dividend-paying stock, but whether to invest at all. When pondering the choice between investing or spending, young potential investors often choose instant gratification. Persuading these fledgling capitalists to invest in their future is a challenge.
That’s why it pays to keep investments simple, especially for newbie investors. Peter Lynch said it best in his classic 1994 book Beating the Street: “Never invest in anything that you can’t illustrate with a crayon.”
U.S.-based utilities are easy to understand as businesses and their stocks are excellent proxies for dividend growth. Utilities provide essential services, a virtue that tends to make their stocks recession-resistant. They’re also insulated from overseas shocks, such as geopolitical tensions and trade wars.
For our “dividend map” of the best utilities stocks to buy, click here now. These companies are cash cows that generate juicy double-digit yields, year in and year out. They’re appropriate for any type of investor, at any stage of life.
John Persinos is the editorial director of Investing Daily.