If you are looking to create a passive income (i.e. an income that comes to you without any ongoing active involvement on your part), then investing in dividend yielding stocks is a good way to go about this. Compared to alternative places where you can invest your hard-earned cash (money market funds, Certificates of Deposit, bonds, etc), dividend-bearing stocks can give you a much better return on investment. In fact, some of these stocks offer the best returns you will find anywhere!
Many people think about investing in the stock market purely for the potential capital gains, but they are ignoring the fact that up to 35% of the stock market's performance is actually down to dividend payments.
Take a look at the S&P 500 index for example. In the 50 years to 2007, across the index, dividends have grown at over 5% per annum. That means that if you'd invested just $1,000 in the S&P 500 in January 1957, your dividend income would have been around $40 for that first year. At a rate of 5%, using a standard compound interest rate calculation, that initial $1,000 would now be worth $20,260
Whereas if you had just invested the $1,000 in a money market fund for example, even assuming 5% growth (to be generous), your money would now only be worth $11,467. That's a difference of almost ten thousand dollars!
Assuming inflation over that time was running at 3% to 4% per annum, even if you hadn't re-invested your initial investment would have given you a nice income over and above the rate of inflation and, if the value of the stocks you invested in went up, some good capital gains too. Dividend yielding stocks are definitely worth having in your portfolio, if only to provide you with a predictable income in turbulent times.
Look at the mid-sixties to early-eighties for example. During this period, stock prices only returned an average of 1.45% per annum, whereas the average dividend yield across the S&P 500 index was a much higher 4.2%
So if you add the two together, you get a total of 5.65%. That's a nice return on investment during times when the economy is generally bad.
So think about including some dividend paying stocks in your portfolio. You won't be disappointed!
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