It is well known to all dividend investors that dividend paying stocks outperform non-dividend payers big way over time. Many studies also proved that dividends generally contributed 50% to overall market returns.
Yet many times people need a proof in real life in order to believe it – myself included. In the past I under-estimated dividends. They weren’t appealing to me at all. I hoped for a big run – a home run with growth stocks.
Of course it never happened.
It is also proved that dividend paying companies outperform nonpaying companies in EPS. The reason is that companies which pay dividends are very sober in how they use their cash. They give some cash away and must operate with what’s left. Time proved that their R&D expenses were a lot better and profitable to those companies which weren’t restrained by paying out the dividends.
I started investing in dividend stocks about a year and a half ago. So my dividend portfolio is quite young compared to my fellow investors and yet it started showing the power of dividends.
I keep track of every dividend I receive as well as every option premium I get when I sell puts or calls. When I receive a dividend or an option premium I assign it to the stock which paid it. Then I use that income towards my cost basis.
Here is a spreadsheet I use to do the job:
Every dividend received is added to my cost basis which is then decreased. I do the same with my options income as I wrote in my previous post “How to buy stocks cheap in today’s expensive market” to lower my cost basis.
Since my portfolio is still a “young dividend achiever” the results are not yet that evident but the results of dividend power is already shaping out. These days markets are falling due to a fear of too good economic results to be true (can you see how crazy the markets are by the way?) so the FED may taper (and thus all the great economic results collapse) so investors run to exit.
When I check my trading account with TD Ameritrade, sometimes all my holdings are all in red. And such a quick look at those numbers can scare a novice investor to death and even push you into emotional selling. Check it out:
As you can see, the day gain is scary – all red and total gains are also pointing to mediocre results. But these results do not contain income I have received in dividends and options. When I add that income the results look like this:
Compare the results with dividends and options premium received. The picture is a lot better and very optimistic. At least to me. I can see that investing into dividend paying stocks I can protect my portfolio and the decline in markets is not something you should fear. It is now my friend because I can be buying stocks cheap. And that would add to this dividend effect as a portfolio shield.
And this is only one reason why I fell in love with dividends! Wait when the compounding effect of reinvested dividends starts gaining speed. The portfolio will be growing faster than ever before.
What about you, do you have a similar experience seeing your stocks down on day-to-day basis while in fact they are up? Do you track or edit cost basis according to received dividends?