Dividend-paying stocks are absolutely the fastest and most reliable way to achieve financial security and independence. Holding these stocks for a long period of time helps you realize the true power of compounding dividends. However, life offers too many problems to afford to sit on an investment for 30 years. When you are young and just getting started, you may not have $2,000 to set aside in an investment for 30 years. There are too many short term needs to pursue such extravagant long term goals.
Imagine, if the year was 1980 and you invested $2,000 in General Electric, it would be worth just under $160,000 today. You would have started with 41 shares ($48.78 per share). Today, thanks to stock splits and reinvesting dividends, you now would have more than 4,400 shares! This profit would have been made with you never adding another penny.
General Electric recently closed for $12.00 a share. This price is lower than it was in 1980 and you can now purchase 166.66 shares with a $2,000 investment. Jim Immelt, and his team at General Electric defended the dividend and insist that they will be paid in 2009. Such a move could jeopardize a credit rating already on “outlook negative” at Moody’s and Standard & Poor’s. In the grander scheme of things, Immelt & Co. also know deep down inside that this struggle is about far more than a quarterly dividend. Whether they like it or not, they are custodians of market confidence, and that confidence is woefully lacking right now. Failing to hold the line could put GE on the same trajectory as General Motors.
Immelt knows as well as anyone that if you want your logo on the Mount Rushmore of Corporate America, the dividend must stand. Failing to preserve this most basic tool of capitalism would ruin the company's Blue Chip reputation -- a reputation built on decades of steady returns to shareholders even when the chips were down.
But dividends are also designed to reflect a company's underlying health.
Having fended off pressure to cut the dividend this time is no guarantee it won’t happen. GE’s many business units are all feeling the same economic strains bearing down on the rest of the market. The company knows it and warned 2009 will be “extremely difficult.”
General Electric may be a great buy at $12 but a loss in its rating could cause the price to drop further. It does warrant being included on your Watch List and taking a look later. To potentially repeat the previous performance is certainly worth taking a chance. An investment amounting to $2,000 may not be much money to some people but it could be others life savings.
Investing in stocks is done differently when people have money and when they don’t have money. Although no one wants to loose, a person who has money can wait a longer period of time and allow the market to rebound. A person who has no money may have an emergency and need the money sooner.
It would not be a good idea to purchase 166 shares of GE and need your money the next week. If GE goes up a dollar in price you would make $166 but you will have to deduct the buy and sell commissions from these profits.
On the other hand, there are other good stocks in the market that would allow you to purchase a large quantity of stock. Investors choosing this approach will profit more in the long run. If you purchased 1,000 shares of a $2 stock that was paying dividends in February, not only do you stand to gain money from the stock increasing in value, but you will also gain money from dividends on 1,000 shares.
The dividends earned in February can be used to buy additional shares of the same stock or a different stock altogether. A decision can be made to purchase stocks that will be paying dividends in March. The dividends earned in March can be used to buy additional shares. The cycle continues and you would have successfully taken a little money and accrued a variety of dividend paying stocks.
Dividend paying stocks allow you to meet short term and long term investment objectives. Young people should capitalize on this type of investment because they have more short term and long term goals. Short-term debts incurred due to paying off college tuitions, buying a house, and children expenses can become manageable with the extra dividend income received monthly. In other words, you don’t have to reinvest the monies paid from dividends into more stock.
Parents can utilize dividend paying stocks to meet long term investment needs such as saving for college or creating wealth. Grandparents can use dividend paying stocks for long term investments for their grandchildren and could become a great gift for the holidays. Stocks that pay dividends are a great tool for generating wealth and meeting short-term needs.
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