Basic Ratios for Building a Dividend-Based Stock Portfolio

by Don Schreiber Jr.

Stock prices rise, and stock prices fall. But there is one constant in stock investing, and that is dividends. Dividends arrive every quarter, pretty much without fail.

There are five advantages dividend-paying stocks can provide investors:

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  • They provide a steady stream of income;
  • Over the long term they offer growth through share price appreciation, which helps increase the real (after-inflation) value of an investorÂ’s portfolio;
  • Dividend reinvestment allows your investment to grow at a compounded rate of return;
  • Dividend reinvestment also promotes dollar-cost averaging; and
  • Dividend-paying stocks generally have lower price volatility than non-dividend-paying stocks, since during market declines the dividend stream becomes more important to investors.
In fact, under just about any market conditions, history provides compelling evidence of the benefits of a diversified portfolio of dividend-paying stocks—in particular, for investors who are just starting out and perhaps more risk-averse, and for those already in retirement. And with the changes in the tax laws regarding the tax treatment of dividend income, dividend-focused investing is even more advantageous.

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