The Buy-and-Hold Advantage of Dividend Investing - dummies

The Buy-and-Hold Advantage of Dividend Investing

By Lawrence Carrel

Dividend investors tend to be more committed than non-dividend investors. They’re in the market for the long haul and want to own shares in companies that deliver returns in good times and bad. As a result, dividend shares tend to out-perform non-dividend shares when the market heads south. Several factors contribute to this trend:

  • When stock prices are falling, investors are under pressure to sell to either secure their gains or limit their losses. As more and more investors sell their shares, prices drop even more, often triggering a vicious cycle that drives share prices even lower.

  • Investors typically sell their dividend stocks last. They hold onto those stocks longer because dividend stocks continue to give them a return on their investment.

  • The fact that many dividend stock investors don’t sell tempers any decline in the share price.

  • Investors burned by the large losses from their high volatility stocks look for safer, more stable investments. They may move their money into dividend stocks to protect their gains (with a safer investment) or as a way to capture some returns in a bad environment for price appreciation. Greater investor demand can drive up the share price of dividend stocks even as the rest of the market stagnates. This situation creates a profit circle: Greater demand pushes a stock price higher, which creates greater demand, which pushes the price even higher.

Stocks that offer only capital appreciation through rising stock prices have little chance of providing a positive return when stock prices are falling. Thus, many investors sell these stocks sooner than dividend stocks.