How Dividends Can Boost Long-Term Investment Returns

Buying the stocks of companies that pay steady dividends is one of the best ways to invest. Dividends offer consistent modest returns that are paid while you hold your shares. 

Dividends typically tend to be more popular with retirees who are looking for regular income. Although dividends are usually appropriate for almost any investor at any age, especially if they’re reinvested to purchase additional shares. Here’s a look at how dividends can boost your long term investments.

What is Dividend Investing?

While there are advantages to investing there’s also disadvantages you need to consider before you set to invest in pursuit of dividend income. Dividends are never guaranteed, and companies can and do change them at will. In addition, they’re more commonly paid out by larger and mature companies that are growing slowly. 

Dividend income can be compared to earning interest from a bank in exchange for holding your money in a savings account. For many investors, regular dividend income can be a safe way to grow a nest egg. An investing strategy built on dividend income can be an important part of any saver’s portfolio, especially as a source of cash flow when it’s time to turn lifelong investments into a retirement check.

How Dividend Boosts Your Investment Returns

When you reinvest dividend payments to buy more shares of stock in your investments, you help your portfolio benefit from enhanced compounding effects. Each dividend you reinvest entitles you to more dividend payments in the future, which could supercharge your investment returns.

It’s important to have a strategy in place when it comes to dividends in order to boost long term investment returns. Here are some suggestions you can try:

  1. Aim for High Dividend Yields

This is one of the most frequently used strategies out there for dividend investments. Your focus would be on slow-growing, established companies with a lot of cash flow that pay high dividends. These kinds of investments make sense when you are looking to generate income right away. Just keep in mind that high yields aren’t everything. Companies may not see as much growth in stock value as other companies with lower dividend yields.

  1. Choose High Dividend Growth

Investors with a long time horizon can focus on buying stock in companies that are growing quickly but currently pay lower-than-average dividends. This won’t yield as much income in the short term, but as a firm grows and its business matures, the dividend yield should rise gradually. 

  1. Pursue Dividend Capture

Dividend capture is a more active, hands-on approach to harvesting dividend income. With dividend capture, it’s not as necessary to hold shares of a company for a whole year or even a quarter to earn the dividend. Instead, you swoop in and buy them right before the dividend is paid out. Then once you’re paid, you sell them again so you’re able to buy other stocks.

In order to earn a quarterly or annual dividend payment, you must own a stock before the ex-dividend date, which is typically two weeks before the dividend is paid. After the dividend is paid, you have to decide when to sell. This could get risky because share prices can be unstable and may be lowered once the dividend is paid than when you bought them. It’s important to be cautious if you decide to take on this strategy. Once share prices decline, it can easily wipe out any money you earned from the dividend.

Final Thoughts

Whichever route you choose to implement to your dividend investment strategy, it’s important to loop in a financial advisor for their advice in investments. The financial advisors at JWIM are always here to help you!

Investing should be easy – just buy low and sell high – but most of us have trouble following that simple advice. There are principles and strategies that may enable you to put together an investment portfolio that reflects your risk tolerance, time horizon, and goals. Understanding these principles and strategies can help you avoid some of the pitfalls that snare some investors.

Contact us today for more information on dividends and investments.


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