What makes a stock profitable – its share value or its dividend returns?
Some investors complain that a certain stock’s price hasn’t increased. But if they were to look at how much dividend income they received over the same time period, they would see a very different picture.
What are dividends?
Dividends are part of a company’s profit that is paid to the stockholders, who are, in fact, the owners of the company. If a company’s share value has not increased, you may think that your investment is a failure due to how it appears in media reports and stock charts. However, this same company may be paying you a sizeable dividend… but because this does not always show up in the reports and charts, you get a false impression.
What is a profit?
In recent years, the way we perceive company profitability seems to have changed. In the past, a company’s level of profitability was assessed by looking at the dividends it paid out to its investors rather than the value of its stocks. But today, in the current visual culture of instant gratification, more and more people need to see a line on a graph showing a dramatic rise or fall in stock prices rather than being more patient and accruing dividends on their stocks over time.
Instead of looking at a chart to see your profits, consider looking at the “Return On Investment.” To understand more about return on investment, or ROI, listen to this podcast.
Take it slowly
While watching share prices shooting up may be more exciting than reinvesting dividend payments, there’s a lot of wisdom in the old proverb, “Slow and steady wins the race.”
Compare the drama of a rising stock price vs. the dependable dividend income stream to a game of chess: while dramatic capturing of pieces might make for an interesting game, far too frequently a slow-and-steady strategy wins the game. Furthermore, you can enjoy the dividend income from the stock without needing to sell it, even if its share value hasn’t actually increased.
You may find that you might see less drama from these more low-key strategies, but you will receive more money at the end of the day.
Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You A Grandmaster of Investing, is an avid chess player, international investment advisor, and Certified Financial Planner (CFP®).