When investors buy shares hoping only for capital appreciation, they set themselves up for failure. They give up the increasing income they could have been receiving from companies that pay dividends.
Investors chasing after capital gains can't actually secure their "gains" or receive their "returns" until and unless they actually sell the shares. But then they lose out on future "gains" and "returns."
"The entire investing world is missing something very elementary," according to Steven Dotsch, author of the Guide to Dividend Investing.
“To profit from capital gains appreciation, you have to sell the shares. Then you no longer have them. Then you're back in cash. To stay invested, you must find another stock market winner. Research shows that a matter of luck, not skill."
On February 8, 2011, the FTSE100 index closed at 6,091. However, the index first broke that level on July 14, 1998 when it closed at 6,100. With the FTSE100 currently trading in a tight range of between 5,800 and 6,000, the stock market has gone nowhere for nearly fourteen years.
That means that, for nearly fourteen years, capital gains "growth" stock buy-and-hold investors have seen their portfolios go nowhere. This would be true even if the market had not crashed in 2001-2002 and 2007-2009.
However, during the same period, dividend income investors have received a steady stream of income and dividend checks, often increasing every year. If they re-invested their earnings, they've continued to add to their portfolios, increasing the number of shares they own and therefore also increasing their incomes from those shares.
And even if they spent the income, they received a real, tangible return on their money -- and they still own their original shares. Interest rates fluctuate, yet most dividend paying stocks increase their dividends periodically. Some even have a long history of raising them annually.
When ISA’s launched in 1999 the Bank of England base rate was 5.5% while inflation was 1.6% and falling. Today, base rate stands at 0.5%, and inflation at 3.4%, still well above the Bank’s 2% target. Anyone holding cash is likely to be subject to a negative return after accounting for inflation.
Today the case for investing in inflation beating dividend paying shares is as strong, if not stronger, than ever. Earning money with dividends from high quality companies is the easiest way I know of to generate a generous and steady flow of dependable cash.
Steven Dotsch - managing editor Dividend Income Investor.com
Steven Dotsch - Managing editor - http://www.dividend-income-investor.com - Guide to Dividend Investing, at: http://www.dividend-income-investor.com/guide-to-dividend-investing/ - Dividend Value Profiles, at: http://www.dividend-income-investor.com/british-american-tobacco/