Why I think dividend stocks could make you a millionaire

Dividend stocks could deliver more than just a strong income return in my opinion.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While dividend stocks may be viewed by some investors as mature, lower-risk companies that do not offer a high level of capital growth potential, they could deliver surprisingly strong total returns in the long run.

Dividends suggest that a company is in good financial health, while a rising dividend may indicate that company management is positive about its future earnings growth rate. Furthermore, with investors continuing to demand high yields, stocks that can offer impressive income outlooks may become increasingly popular over time. This may lead to higher capital growth, as well as the opportunity for investors to generate growing returns in the long run.

Dividend demand

As ever, there are a large number of investors who are seeking to generate an income from their portfolios. This may be because they are retired, or could be due to them wanting a second income, for example. Either way, stocks that are able to display a solid track record of dividend growth, as well as the potential to beat inflation when it comes to future dividend rises, could become popular among income-seeking investors. Over time, increased demand from investors may reduce their yields and increase their stock prices.

Financial strength

While it is always worth checking the balance sheet strength and cash flow of a company before buying it, a track record of dividend payments can provide guidance on its financial strength. For example, a stock that has a long history of paying growing dividends may be more likely to have a stable financial future than a company which has a patchy record of dividend payments. This could equate to lower risk which, in turn, may lead to investors placing a higher valuation on it over time.

Increasing optimism

The potential for a rising dividend may indicate that company management is becoming increasingly positive about its prospects. This could be due to improved trading conditions, or the potential impact of a new strategy, for example. Either way, a fast-rising dividend may indicate that the company in question has the capacity to generate improving levels of profitability that will allow it to afford to raise the level of shareholder payments. This could lead to investors becoming increasingly positive about the prospects for the stock, which may mean that a higher rating is required.

Reinvestment

The strategy of most investors is to buy low and sell high. However, one challenge in doing so is a lack of cash which is available to invest when there is a bear market. Dividend stocks can be useful in providing this, since resilient and robust companies with defensive business models may be able to maintain their payments to shareholders during challenging periods for the wider economy.

Those dividends can then be redeployed to buy high-quality stocks trading at lower prices. As such, dividends can provide a useful cash inflow for investors during a variety of market conditions. This can be used to strengthen their portfolios during the most opportune periods.

More on Investing Articles

Investing Articles

With a huge 9% dividend yield, is this FTSE 250 passive income star simply unmissable?

This isn't the biggest dividend yield in the FTSE 250, not with a handful soaring above 10%. But it might…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

With a big 8.5% dividend yield, is this FTSE 100 passive income star unmissable?

We're looking at the biggest forecast dividend yield on the entire FTSE 100 here, so can it beat the market…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Why did the WH Smith share price just slump another 5%?

The latest news from WH Smith has just pushed the the travel retailer's share price down further in 2025, but…

Read more »

ISA coins
Investing Articles

How much would you need in a Stocks & Shares ISA to target a £2,000 monthly passive income?

How big would a Stocks and Shares ISA have to be to throw off thousands of pounds in passive income…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

£10,000 invested in Diageo shares 4 years ago is now worth…

Harvey Jones has taken an absolute beating from his investment in Diageo shares but is still wrestling with the temptation…

Read more »

Investing Articles

Dividend-paying FTSE shares had a bumper 2025! What should we expect in 2026?

Mark Hartley identifies some of 2025's best dividend-focused FTSE shares and highlights where he thinks income investors should focus in…

Read more »

piggy bank, searching with binoculars
Dividend Shares

How long could it take to double the value of an ISA using dividend shares?

Jon Smith explains that increasing the value of an ISA over time doesn't depend on the amount invested, but rather…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

£5,000 invested in Tesco shares 5 years ago is now worth this much…

Tesco share price growth has been just part of the total profit picture, but can our biggest supermarket handle the…

Read more »