Why Dividends Are Important

When making a investment decision, Dividend Yield is the fist thing I look at. I consider many other factors, but I never invest on non dividend paying companies. This is why dividends are so important to me.

1. A Guarantee Of Safety

Generally companies which pay dividends are well established and managed professionally.
A company can not pay dividends (and keep on increasing it for years) if their core business is at risk. Financials can be manipulated but dividends are not. If they don't have cash, then they can't pay you. Once they pay it, it is cash in your pocket and it is yours to spend.
 

Dividends are the best feedback I can get from a company. Look at the companies like LLUB, NEST, CTC, GLAS, etc. They have been doing something right for decades. If you are holding a dividend paying stock, there is a team of professionals working tirelessly for you. They will worry about the economy, government policy, inflation, war or even zombi attacks for you. When I receive a dividend check, it is not just a check. It's a Certificate of Safety.

2. Beating The Inflation

Investors must keep a close eye on the inflation. Inflation eat up the wealth without you being noticed. However dividend investors can protect their income against inflation by carefully selecting companies which increase dividend at a rate higher than the inflation.
If you are going to retire one day(we all will) and live off the dividend income,
then you have to make sure your dividend check get bigger in every year.

Sri Lanka is a high inflation(10%) country. I always look for companies with a track record of increasing dividends at a rate higher than 10%. This is where [Share Screener] becomes a great asset to me. There are 32 companies which have 5 year dividend growth rate of 30% or more. All of them may not suitable for dividend investors. But there a plenty of opportunities to explore. I do share my dividend analysis here. make sure to subscribe or visit this page frequently to get the updates.

3. Passive Income Generation

This is the ultimate goal of dividend investing. Idea is to collect enough dividend paying shares over the time, to a level where annual dividend received is higher than your annual salary. Imagine what it would be like if you can live off the dividend without touching capital investment. You will never run out of money and one day you can hand over your entire wealth to your grand kids.

I hate to wake up and go to office every morning. I hate rush hour traffic. My dream day will begin when I quit my job and start living off the dividend income. Dividend investors do plan for retirement 10-20 years ahead of time. My parents worked till their 60's to get a pension which became worthless in less than 5 years due to inflation. I'm not going to do the same mistake.  I will go on to details of my retirement plan in a separate post.

4. Magic Of Compounding

Albert Einstein is a true genius. He said, "Compounding Interest is the Greatest Force in the Universe. He who understand it, earns it and he who doesn't, pays it". Dividend investors can reinvest their dividends and earn more from reinvested dividends. Over the years compounding will have a staggering effect on your portfolio.

Actually my favorite part of investing is re-investing the dividends. LLUB is a perfect example for Compounding effect. They pay dividend quarterly. I buy 100+ new shares in every quarter by reinvesting the dividends. If you do the match, my actual dividend yield is considerably higher than the indicated yield. Compounding is a nice topic to discuss and I'm going to make a separate post on this in the future.

5. It Teach Financial Discipline

Perhaps this it the most important part of dividend investing. Dividends will teach you the time value of money. It will prevent you from over trading. You will not do any stupid mistakes. Noise in the market will not effect your decisions. You will have more time to read and think than clicking the mouse. Eventually you will learn to live below your means and save for the future.

I learned that buying new stuff and posting on Facebook will not help in me a long time ago. For many, first thing on the list is a new vehicle after getting first salary. Then maybe a housing loan which you will pay for next 20-30 years. Add a insanely expensive wedding to that and your financial future will be sealed for ever. Most professionals I know lives from pay check to pay check. There is no retirement plan in the horizon, let alone an early retirement. Dividend investors will never fall in to traps like this. That alone is enough for me to invest on dividend paying companies.