While it would be nice to win the National Lottery, odds of one in 45m do not seem to be all that appealing. Despite this, a large number of people buy a ticket on a regular basis in the hope of beating the odds.
However, investing in dividend shares could offer a significantly better opportunity to generate high levels of wealth over the long run. Dividend-paying stocks have a long track record of delivering impressive total returns, with the reinvestment of dividends offering access to the power of compounding. And with there being a wide range of shares offering high yields at the present time, it could be the right moment to buy dividend shares for the long run.
High returns
Companies that pay dividends could be attractive to investors for a variety of reasons. When dividends are paid, it suggests that the company in question is profitable, and that it is able to afford to share its success with investors. Although dividends can be reduced and even cancelled in some cases, the payment of a dividend indicates that the business in question has performed relatively well during the year. It also provides an indication as to the financial health of a company, with a strong and stable dividend suggesting that it has a sound business model.
A rising dividend indicates that a company’s management is potentially optimistic about its future growth. Managers may be anticipating improving market conditions, or that a strategy they are implementing will lead to a higher level of profitability. As such, a rising dividend can lead to investors becoming more bullish about the prospects for a stock, and could lead to a higher share price.
Of course, the reinvestment of dividends can lead to impressive total returns in the long run. This is due to the impact of compounding. Over an investor’s lifetime, this can have a major effect upon their financial situation. It therefore may offer a more attractive means of generating wealth when compared to The National Lottery.
Investing potential
With the FTSE 100 having a dividend yield of over 4% at the present time, it appears to offer significant dividend investing potential. The world economy faces a variety of risks, such as increasing protectionism and the impact of a rising US interest rate. However, this could lead to greater margins of safety, and higher yields, being available in a variety of sectors.
In fact, it is relatively straightforward to build a portfolio of FTSE 100 shares which average a dividend yield of over 5% at the present time. As such, now could be a good time to buy income-producing shares, since they may offer a margin of safety.
While dividend investing may not offer the instant potential rewards of The National Lottery, the track record of the FTSE 100 suggests that it could prove to be a sound strategy. As such, it may be worth focusing on dividend stocks, rather than on the luck of the draw, in order to build a high net worth over the long run.
