4. Quality Companies Are Not Short-Sighted
The Strength of Money
A company's financial strength can be demonstrated by strong balance sheets and strong consistent, predictable cash flows. Often, evidence of this financial strength takes the form of dividends.
The Dow Jones Industrial Average ended the two time periods below at essentially the same level at which it began. Yet the index had positive returns during both periods thanks to the compounding of dividends.
The Power of Dividends in Tumultuous Times
Dow Jones Industrial Average — Growth of $10,000 Investment
Dividend Strength Has Historically Tied to Strong Performance
Historically, companies that have initiated or grown dividends have outperformed companies that have cut dividends. Quality dividend payers — those paying consistent and rising dividends historically — have offered better overall results.
Average Annual Total Returns of S&P 500 Stocks by Dividend Policy30-Year Period Ended June 30, 2014
The Decade Ahead
While financial strength may help a company weather volatile markets, perhaps more importantly it may position a company for competitive gains. Why? As weaker companies pull back or fold during difficult periods, stronger competitors survive to meet the market demand when markets improve.
The Bottom Line
- High-quality companies often survive market downturns and can potentially become stronger and more efficient as a result.
- Dividends can be an indication of a company's financial strength. Over time, compounding dividends have had a significant impact on cumulative returns, even in sideways markets.
- Speak to a financial advisor regarding an effective way to invest in quality companies.
Another reason to be an equity investor: Equities Help Protect Purchasing Power
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All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Investing in dividend-paying stocks involves risks. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease, or totally eliminate their dividends without notice.
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