A well run company with a fair valued stock price that pays a dividend is a beautiful thing. One reason I love dividends is that regardless of the stock price, you will receive the same dividend payment. For example, let’s say you invested $10,000 in JP Morgan (JPM) at a stock price of $100.00. You are now the owner of 100 shares. Currently, JPM pays out a dividend of $3.60 per share annually. Therefore, every year JPM pays you $360.00 just for owning the stock. What if the stock drops to $50.00? or $25.00? As long as JPM remains a strong company, they will keep paying you that same dividend of $360 a year. Even better is that if you decide to buy more shares when the price drops, you will be earning a higher dividend yield on your shares. At $100.00 the dividend of $3.60 was a 3.6% yield on your money; however, at $75.00 that same $3.60 dividend is now a 4.8% yield!
We have just seen how dividends can remain a constant source of income in a volatile market. If you have any reasons to believe the market will go down, you will still see that dividend payment come every quarter just for owning the stock. Now let’s say that you are a prudent investor who has saved and invested and now has $100,000 by age 30. If you invested it all in JPM at $100.00 (in a real scenario you would want to diversify), and you didn’t touch it until age 40, assuming a modest return of 8% you would have around $215,892.50. You would also have collected around $36,000 in dividends. That is money you could have spent on new furniture, a big screen TV, hot tub, or down payment on a car or house. Let’s say you didn’t touch the money until age 50. You would now have around $466,095.71, and you would have collected roughly $72,000 in dividends. By age 60 you would have roughly $1,006,265.69 and have collected $108,000 in dividend payments. Of course, if you had reinvested the dividends then the total would be even larger than $1 million. However, that is what is so great about dividends; it is your money, and you are free to spend it or reinvest it. That money could be spend on college tuition, brooks brothers shirts, a new couch, vacations in the tropics, donations to your favorite organization, etc…
What would I do with the dividends? I would without a doubt reinvest them. I am in my twenties, so I have a very long-time horizon to work with. The value of any money I come across right now in my life is much more valuable than the same amount of money I would get at age 30 or 40 simply because I have more time for compounding to work. But of course the value of money is only one factor. Happiness is another. It isn’t wrong to spend money if it makes you happy. Money is a means, not an end. I simply enjoy investing and seeing my money grow more than anything I could currently buy right now. Everyone is different.
Not to mention, at any point you could also spend the principal in your investment portfolio. If at age 50 you wanted to spend your almost $500,000 on an Aston Martin, a new house, or whatever you please there is nothing stopping you. I haven’t taken into account tax implications, but there are many ways to minimize taxes on long term investments especially if they are in a retirement account.