Liberty Maven

The above chart indicates exactly why many investors, smartly, look for stocks that pay dividends.  Dividends are simply a method for companies to deliver a portion of their profits to shareholders; however, the consistency and strength of a given dividend often reflects the strengths of the companies.  Investors often view dividend-paying stocks with greater confidence, as many investors see dividends as a constant measure for a given company’s accountability.

Perhaps one of the most powerful attributes of dividend-paying stocks is the ability to reinvest the received dividends back into shares of that company.  Many companies offer a dividend reinvestment program, commonly referred to as a DRIP, that purchases more shares of the company using every dividend.  Often, these programs also allow the purchasing of fractional shares using dividends, further extending the purchasing power of the dividends.

Such dividend reinvestment programs are often offered only directly from the company itself.  However, many full-service and discount brokers offer dividend reinvestment for all stocks, usually for free or at a marginal cost.  As reflected in the chart above, dividend reinvestment has the capacity to increase gains far beyond the growth of the share price alone.

That concludes this week’s Free Investor, as this is a holiday weekend.  Next week we will discuss some of the drawbacks of dividends, as well as some dividend-paying stocks that could have a bright future.