Why Dividends Matter in a Portfolio - Articles & Commentaries

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05 April 2023

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Dividends may not be as flashy as eye-watering returns that you get from tech stocks or cryptocurrency, but they are a dependable and reliable partner you can count on in good times and bad.

By providing a cushion against market volatility and a steady source of income, the importance of dividends are manifolds. In our latest Fundamental Flash, we will explore the power of dividends and why they should be a part of any investor’s toolkit.

1. Income Generation

Dividends are a form of regular income that an investor receives from their investment in a company. Depending on the company’s dividend policy, the payout which comes from the company’s profit reserves may be declared annually or more.

As markets ebb and flow, dividends can be invaluable to help buttress an investor’s portfolio through a consistent source of income even if the stock price falls.

2. Lower Volatility

Dividend stocks tend to be more resilient in a market downturn, providing investors a cushion during periods of extreme volatility.

This is because companies that pay regular dividends tend to have stable cashflows and recurring income streams such as through rental or subscription revenues. Some examples include utility companies as well as REITs that pay consistent and reliable dividends due to their income-generation attributes which are more predictable in nature.

Risk averse investors who are looking for more defensive asset classes or who are nearing retirement can consider employing a dividend strategy in their portfolio to minimise risk, while still earning attractive returns over time.

3. Potential for Growth

Companies that consistently pay dividends often have a solid financial position and a history of stable earnings growth. This can be an indication that the company is well-managed and has a strong business moat that can fend off competition and maintain pricing power.

As such dividend investors can enjoy the potential for both capital appreciation and regular income, making them a valuable addition to any portfolio.

4. Compound Returns

Dividends are also a great way for investors to compound their returns by reinvesting them back to purchase additional units of the dividend fund or shares. Over time, investors would be able to reap the power of compounding as reinvested dividends are again reinvested to amplify returns.

Investors in Asia are particularly well positioned to benefit from this secular trend as companies in the fast-growing region continually increases its dividend payouts.

Get Paid to Wait

Whether you’re a seasoned investor or just starting out, all investors can benefit by allocating a portion of their investments into dividend funds to generate a consistent stream of income particularly during bouts of volatility.

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