Many different investment philosophies could lead to financial freedom and long-term wealth. One successful investment strategy involves investing in companies that pay regular dividends to their shareholders.
What are dividends?
A dividend is the annual pay-out a shareholder receives from the company’s profits for that financial year. As long as you own shares in this company and the company is profitable, you are likely to receive money on a quarterly basis, without spending more money or working harder. Dividends can be equated to passive income, as you receive income without any further effort beyond your initial investment.
How do dividends grow wealth?
Many investors see dividend stocks as one of the best tools for building long-term wealth and regularly use their dividends to purchase shares in other companies that regularly pay dividends so that the so-called passive income increases.
An organisations dividend history is a ‘track record’ of that company’s ability to generate income for its investors. For this reason, when purchasing shares, look at global brands who pay regular dividends to their shareholders.
One of the advantages of owning shares in companies that pay regular dividends is that while the price of the shares might be increasing at a very slow pace, you are still receiving income, which ultimately lowers the risk of your investment portfolio. Companies that are well run and financially sound, often continue to pay dividends even if their share prices decline! Dividends can also be a great solution for investors that require some form of regular income.
The track record for dividends
From 1926 to 2011 dividends were responsible for over 43% of the S&P 500 returns. That’s about half of the total return in dividend payments.
Dividends have also, over time, had the power to influence stock prices. On average, a dividend increase pushes the stock price up by 2% (Aharony and Swary), a dividend initiation increases the stock value by over 2% (Michaely, Thaler & Womack) and a dividend cut decreases the stock value by 9.5% (Healy and Palepu).
The goal of any business, big or small is to make profits for its shareholders. Paying dividends is a clear indication that an organisation is doing something right.
Dividends are tax efficient
Based on the investment strategy we employ, the main tax expense comes from the dividend income received on our investments. Tax on dividends is normally lower than other forms of income tax, thus allowing our clients to maximise tax efficiency.
If you would like to invest global brands that have a long standing dividend history and create passive income contact AXIAM.