Why Dividend Yielding Stocks Are Essential to Your Portfolio

investment portfolioThere are many portfolio management strategies to consider when investing your money, but the first and most important is one that relates to diversification. When your investment portfolio is properly diversified, you will have protection from a downturn in the economy, and at the same time, you will have potential for growth. The first step in achieving this is with dividend yielding stocks. The following are three observations about this type of stock.

Dividend yielding stocks can grow in value

Many investors do not realize that companies that pay dividends have a tendency to grow over time. The reason why they pay dividends is because they are profitable companies. Some of these profits are invested back into the company, and this leads to further growth. Of course, without paying dividends, there would be more money to invest in the company. This could lead to higher share values, but the idea that paying dividends will restrict the growth of the company’s future stock price is incorrect. A company can pay both a dividend and increase the value of the company and the stock price over time.

Dividends can be reinvested

There is no law saying you must spend your dividend or even invest it elsewhere. You can take the money paid to you and purchase more stock. Over time, your number of shares will increase, so when you reach the age of retirement, you will have a large number of shares, each paying dividends. This type of company has a reputation for being a solid investment to those on a fixed income, so you will have the perfect retirement vehicle, and a portion of your stock holdings came from reinvesting your dividends.

The key to buying dividend yielding companies

When looking for companies to invest in that pay dividends, the focus should be on consistency. Over time, a company should have paid dividends to its shareholders most of the time. The reason for this is that it is too easy for a younger company to pay a large dividend. Although this high dividend will attract lots of attention, the truth is that the company will not be able to sustain a high yield for their investors for a long time. Older companies, those that are not as glamorous, will usually pay lower dividends, but are committed to paying those dividends to their shareholders.

There are many ways to diversify your investment portfolio, but diversification should begin with a stable, but growing, companies, and the best way to accomplish this is by buying stocks of companies that pay dividends.