Introduction
You may have heard that the basic idea of the stock market is to buy low and sell high. Pardon me for saying so, but that sounds like a lot of work. An investment represents money that is supposed to work for me, right? Having earned my money once already, why should I have to work for it all over again?
When it comes to redundant and wasted effort, nothing tops the stock market. I came to the conclusion long ago that investors, professional and individual alike, work much harder than necessary. As JP Morgan once promised, stock prices will fluctuate--everyone knows that. Even blue-chip businesses can see their market values swing 50 percent or more over the course of a single year. These ups and downs seem to promise great wealth, if only the investor can time the buys at low points and the sales at high ones.
The trouble with this mentality--in addition to poor odds of consistent success, of course--is that it puts almost 100 percent of the responsibility for profits on the back of the stockholder rather than the stock. It's as though the stock market is not about business at all, but rather a grand game pitting wily investors against each other in attempts to beat the market.
Yet the fact remains that stocks are capable of providing attractive returns to their owners. Treated as partnership stakes in profit-seeking businesses, stocks are highly useful tools--tools for storing value, tools for generating income and accumulating wealth, tools effective enough to meet a lifetime's worth of financial goals. But if we are to shed the game mentality of our fellow investors, our stocks must provide an alternative source of reward. Rewards with no additional effort. Rewards not subject to the whims of Wall Street. Above all, rewards paid in cash.
Those rewards are cash dividends.
In Morningstar DividendInvestor, I once wrote that subscribers shouldn't expect the 1,000 percent returns other newsletters promise, at least unless they were willing and prepared to follow my advice for the next 25 years. But that's the point: A 10 percent annual return, well within the reach of a simple, low-maintenance dividend strategy, turns $100,000 into $1.1 million over a quarter of a century. As of this writing, it's also possible to generate income from a portfolio of dividend-paying stocks equal to 6 percent or 7 percent of its initial value without any need to trade. Best of all, this income can and should grow faster than the cost of living. In a world where we're lucky to find bonds and CDs paying even 5 percent, and these options providing no respite from the threat of inflation, I hope these observations will come as welcome news.
At the bottom of it all, it is income, not capital gains, that most investors need to meet their financial goals. Fortunately, many conservative, well-managed, and economically attractive businesses are prepared to provide good income through dividends.
Dividends are worth much more than the sum of income they generate. No matter how routine on the surface, each dividend is a critical signal of the financial health, growth, and value of a business.
I strongly suspect that most investors would just as soon not live their lives entangled with Wall Street's never-ending pageant of fear and greed. Dividends, by contrast, set the investor free from fickle market prices and unreliable capital gains.
