Daily Gains Letter

Warren Buffett Is Right—Buy Dividend Stocks Over Time, and Build Your Wealth

By for Daily Gains Letter |

Build Your WealthIf you are saving for your retirement, it’s likely that you will have some exposure to the stock market, whether it is through mutual funds, exchange-traded funds (ETFs), or individual stocks. If there’s one thing I’ve learned over the years, it’s that you don’t have to be chasing the latest highflier to do well on the stock market. In fact, picking a solid blue chip name with increasing dividend payments to shareholders is often a much more fruitful and less stressful way to invest.

Even in mature industries, you can do well over time by owning a solid business. What’s required is to take those dividend payments and reinvest them in new shares. This is how you create wealth for yourself on the stock market.

Consider, for example, a company like PepsiCo, Inc. (NYSE/PEP). This beverage and snack maker sells a lot of brand-name products that you would be familiar with. The company has a long track record of appreciating in value on the stock market and increasing its dividends to shareholders. The company’s recent stock market chart is below:

Pepsico Inc Chart

Chart courtesy of www.StockCharts.com

PepsiCo is a $100-billion global company that currently boasts a dividend yield over three percent. If you pull up a very long-term stock market chart on the company, you will notice how consistent it has been at appreciating in value. The company offers a dividend reinvestment plan, so all those quarterly dividends are automatically used to acquire new shares in the company over time. This creates a compounding effect as more shares equal more dividends, and what is useful about PepsiCo’s dividend reinvestment plan is that you can choose to put all or a portion of the quarterly dividends into new shares. So, you can still accumulate new shares, while also getting some dividend income for other purposes if you choose.

There’s a reason why Warren Buffett’s Berkshire Hathaway, Inc. (NYSE/BRK-B) holding company is so successful and boasts such a great track record on the stock market; it owns large positions in many blue chip, dividend paying companies, and it reinvests those dividends into additional holdings. The wealth compounds over time, and that’s an important strategy if you want to own stocks for your retirement. Berkshire Hathaway’s stock market chart is featured below:

Berkshire Hathway Chart

Chart courtesy of www.StockCharts.com

Saving for retirement doesn’t have to be complicated, and you don’t need to own the latest high-tech stock to do well. Over time, instead of chasing stocks and deciding which names are beating expectations, you’ll likely do better investing in a mature business with a good long-term track record on the stock market. And of course, you need that company to pay dividends every quarter.

The stock market is always full of risk and fear; investors buy on rumor and sell on news. But, there’s a big difference between speculating in the stock market and investing in it. Warren Buffett is right: pick good, quality companies that pay dividends, and buy them when they are attractively priced. Saving for retirement has always been this simple.

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