Dividends mean you can make money in any market.
The stock market has certainly been volatile recently -- the term "roller coaster" springs to mind.
As an investor, those wild swings present a dilemma. You have to be invested to take advantage of the long-term upward movement in the market. Yet any investment in the stock market has an element of risk, and there's little to protect you from the inevitable short-term slides.
And share price drops can happen to any business, not just the tiny firms where extreme volatility is expected. Just look at how far even some big companies have fallen in the last year:
| Share | Price
Aug 15 05 | Price
Aug 15 06 | Change
% | Mkt Cap
£ |
|---|
| PartyGaming
(LSE: PRTY)
| 160p | 104p | -35 | 4.2bn |
| Carnival
(LSE: CCL)
| 2859p | 2029p | -29 | 4.3bn |
| Emap
(LSE: EMA)
| 835p | 706p | -15 | 1.8bn |
Given that potential for loss, the best approach is only to invest money that you can afford to lose.
Thing is, it's very tempting to break that rule and invest more than is prudent. And if you make that mistake, you may have no option but to sell shares at a low price if you suddenly need cash, even though you're 90% sure that the share concerned is in a temporary lull.
There is, however, a way to get cash from your shares without the risk of having to sell in a bear market. In other words, you can have your cake and eat it too!
If you buy shares with solid, sustainable and rising dividends, you can take advantage of the long-term appreciation of shares, while receiving cash to do with as you please.
Sure, dividends are not guaranteed payments. Northern Foods
(LSE: NFDS)
, for example, halved its dividend in June after the company admitted times were tough.
But these kinds of cuts are pretty rare for big companies. Directors are reluctant to cut the dividend because they know it will be seen as a sell signal by the market.
Look at Lloyds TSB
(LSE: LLOY)
. The bank was a stock market darling in the 90s, but it's struggled since 2001 -- partly because it paid too much for life assurer Scottish Widows. However, in spite of those problems, it's continued to pay out 34.2p a share every year since 2002; that's a 6.5% yield!
In fact, dividends can be a major part of the return for any long-term investor. These figures from the 2006 edition of the Barclays Equity Gilt Study illustrate the point nicely.
If you had invested £100 in a representative basket of UK equities in 1945 and not reinvested the dividends, you would have had £279 at the end of 2005, after adjusting for inflation. But if you had reinvested the dividends all the way along, your original £100 would now be worth an inflation-adjusted £4,061. That's quite a difference!
If you're looking for some dividend payers for your portfolio, take a look at our investment service, Champion Shares. Not all of our picks are income shares, but four of the last five tips were paying out a yield of at least 4% at the time of recommendation. Sign up for a free 30-day trial to the service and you can read all four tips.
And whatever you do, think about boosting the yield in your personal share portfolio. To my shame, none of the shares in my portfolio pay any dividends. I need to change that.
> Perfecting The Index Tracker
Thanks to Chuck Saletta for the concept for this article.
