http://seekingalpha.com/article/714501-the-power-of-double-compounding-in-dividend-growth-stocks

There’s one more thing thing,
. . . whenever the stock price goes up, you make a paper profit,
. . . whenever the stock price goes down, you make a real profit,
. . . as your dividends buy more shares cheaper and
. . . if your smart, you throw some optional cash in at that time.

Once, you realize, that your making money no matter if the price
. . . goes up or down, you stop worrying and sleep nights, and
. . . if your company has a tripple-A rating,
. . . you have a money making machine.

Recessions, scare off other investors,
. . . but that’s when your reinvested money machine is automatically,
. . . buying more shares, that will pay growing dividends, that
. . . compound year after year.

1) Dividend 3.4%
2) Dividend payout $ grows each year
3) Recession drives price down, allowing Dividend $ to buy
. . . more shares for the same amount of money.
4) Re-invested shares “Compound” total stock $ value.

Under your theory, the stock is a baseball card teetering on the edge of worthlessness the second a company performs poorly. Why do you want to own more of it? Why not take the cash and invest elsewhere? I guess maybe because owning more shares increases future dividends…but what else am I missing?

http://www.berkshirehathaway.com/letters/letters.html

Graham also makes the point, in several of his books and writings, that dividends are the end game. They are the whole point of owning a stock. Without at least the prospect of dividends, a stock is worthless: it’s just a piece of paper (like a baseball card), barring takeovers, etc. If all that was possible was capital gains then it would just be a game of finding a greater fool. The whole point of a business is to make money for its owners. Dividends are how shareholders get paid. Like others have pointed out, you don’t necessarily want a dividend right now if that money could build more value for the company, but it is the ultimate goal.

The whole argument of whether companies should “plow money back in,” in a general sense, is nonsensical because it all depends on the individual company. I will say, though, that I believe Graham was right: too many companies withhold dividends and end up losing money for the shareholders.

I like dividends because they can be reinvested, and can compound the growth of your equity.

Some companies pay dividends, others not. The theory is that if the management of a company can earn more than I can, then they should reinvest the money. If they think I can get more on the money than they can, then they should pay it out as dividends.

When you’re young and you want to grow your money outside of an IRA or 401(k), then having a no-dividend stock makes sense, because you don’t pay any tax until you sell the stock. And if you pick a good company like Berkshire (Buffett’s company) then you’ll never need to sell until you need the money.

On the other hand, if you’re retired and you need to buy food and gas, well, then there’s nothing wrong with a dividend.

As for the recession, and the risk of a missed dividend, there is a class of stocks called dividend aristocrats. Look them up; those companies have never skipped a dividend, and have grown it every year for 25 years or more.

I’m not a gambler. It is wise to buy stock when the market sets too low a price. It is not wise to believe the markets pricing to reflect accurately the worth of a company. Steady and existing sales may be boring but just as cash are one of the real assets a company can have.

“High yield means high risk.”

You can get very high yield dividends, if that’s what you want, by investing in junk bonds and very risky companies. Good luck if you go that route.

Personally, I like dividends. But I also don’t want to take high risks. So I don’t go for the highest dividends.

I especially find it gratifying when I see people in Wal-Mart (stock I own) buying products in stock I own (Pepsi, Coke, Tylenol) and even using banks or credit cards I own stock in to pay for their purchases (Visa, Wells Fargo). It’s like the circle of life.

The key is having a plan, if the dividend gets cut or stays the same for a number of quarters, the fundamentals of the company change, then sell and redeploy.

Like Steve S says below, the types of companies that drop dividends tend to be different than the ones that reinvest. Good sources of dividends tend to be utilities and blue-chips. Growth companies tend to choose to keep reinvesting their stock (much like Apple did until recently). All things equal, you’re slightly better off with a company that doesn’t drip than one that does because of taxes. Generally things aren’t equal, and you’re better off with growth stocks for the long-term and blue-chips over shorter terms (or a nice mix suited to your own risk levels), dividends being an unfortunate (because of taxes) side-effect of the safer stocks.

Looking at Apple as a single case is uninformative because there are many things going on that affect the stock price of a firm, and publicity around Apple’s unprecedented dividend played into that (also, you know, Apple products doing well). Most dividend stocks quietly give their dividends without fanfare because they’ve been doing it on a regular basis for quite a while. And right after they drop a dividend they’re worth less than right before. Because mechanically the company is worth less. Just like your net worth drops right after you give money away, but goes up after you get paid or the value of your house increases or what have you.

However, I would give you a word of caution. Dividend investing, just like any other subset of investing, requires some degree of effort. You need to lay out a basic plan and stick to it over the long run to be successful.

If you aren’t willing or able to put in the needed effort, stick to major market index funds with low fees.

But if you are willing to expend the effort to educate yourself about investing, it can be a very rewarding (mentally and financially) activity.

If you start bouncing all over the place chasing high yields, you’ll get burned.

Look at Apple. They issued a dividend in November. Price dipped for a few days, then came back up to above the ex-dividend price. They issued one in August, too – and with that one the dip (if any) barely even paused the climb in price. As far as I can tell from this example, the ex-dividend price hit is noise and should only be relevant to higher-turnover traders. Exxon’s dividends in 2012 tell the same story.

I invest in an automatic DRIP (dividend reinvestment program) and the automatic reinvestment of the dividend income to new shares will help my very small portfolio grow. I purchased my first shares in 2012.

I need to increase the number of companies I hold shares in to about 12 from the current 3. I will concentrate on Canadian banks and resource companies.

It isn’t really magic. This is missing the whole point of why a company issues stock in the first place. They need your cash to expand operations and grow the strength/profitability of the business. The increase in stock price comes when they realize the gains from the machines or personnel they acquired with your money (by producing more, increasing market share, releasing a new product, etc.)

A company that pays dividends is basically saying “we don’t have any way to profitably invest this cash to expand our business, so we’ll just give it back to you”. This is why large, stable companies like Coca Cola and Proctor & Gamble pay good dividends. They have so much extra revenue from their sales and not enough profitable ways to spend it.

So in reality, you could look at a dividend paying stock as a laggard in the market, resting on its laurels and counting on continued, uninterrupted market dominance. That obviously doesn’t apply to all, and doesn’t make them bad investments, but it’s worth thinking about whether a non-dividend paying stock is really just a “baseball card” growing in price by “magic”.

If you take the dividend money and DRIP it, then you have the same value of stock (minus taxes, and if it isn’t a direct drip, fees), but each share is worth less. You just have more shares.

My investing style values dividends. Today I’m getting 5.5% from a self created UK based High Yield Portfolio (HYP). Additionally, I am getting close (just have to subtract fund expenses) to 4.6% from an ASX200 Equity Tracker and 3.5% from a FTSE100 All Share Tracker.

In contrast I also hold some US Equities and it galls me to see a dividend yield of 2.1%.