Dividends: How Beneficial Are They?

If you've ever taken a finance or risk management class, you've probably heard someone say that the purpose of the execs is to maximize shareholders' wealth AND minimize the cost of risk. Well focusing on the first part, maximizing shareholders' wealth could definitely include activities such as dividend payments. Dividend payments are small payments (although some are not so small) given to shareholders from additional funds the company has acquired. For most shareholders, a dividend payment is good and makes them feel secure in the well being of the company. In fact, Michael Brush agrees and states that firms who pay dividends are usually in a stable market. In addition, those firms tend to pay out dividends during good and bad times; who wouldn't want to be a part of that.

But how important are dividends? Is it worth still holding on to stock? Yes, dividends could be very advantageous, especially for those who participate in dividend investing. In one article, it listed 7 benefits from participating in dividend investing (holding on to dividend stocks). They are:
1. In a troubled market, dividends provide investment stability - I agree and this coincides with Michael Brush's belief.
2. Unlike earnings, dividends can't be manipulated or faked - This is true because with dividends, you either get them or you don't. Just holding regular stock, even if the price of the stock is increasing, the company could still be in financial trouble and the stock market hasn't reflected it yet.
3. Dividends provide continuous feedback - Again, another point that reiterates the aforementioned benefits. Shareholders receiving dividends, especially on a continuous basis, know the position of that firm.
4. Reinvested dividends provided a significant portion of the historical equity returns.
5. Good dividend companies grow their dividends - As a shareholder, you don't just want the same amount of dividends. Instead, you want the dividend amount to increase, showing true progress of the company.
6. Spending dividends in retirement, does not harm your principle investment
7. A dividend portfolio is relatively low maintenance.

When firms' board of directors declare a $.45 or $.55 dividend payment, I am sure that most people see this as a small payout compared to the cost of the stock. Well, those dividend payments mean more than you think. Just take a look at a person who receives dividends. Assuming dividends are a reflection of the company's progress, the stock price will rise. So not only does the shareholder receive a dividend payment, but they will earn on their stock. My position on dividends is a positive one and I value them as well. Dividends are worth the price (i.e. stock price) to you pay in order to become a shareholder. Hoping that execs are looking out for your best interest, those dividends will pay off in the long run.

Sources:
1. http://articles.moneycentral.msn.com/learn-how-to-invest/whats-a-pe-and-9-other-dumb-questions.aspx
2. http://dividendsvalue.com/1289/seven-important-reasons-for-dividend-investing/
3. http://articles.moneycentral.msn.com/learn-how-to-invest/stocks-that-pay-you-to-own-them.aspx