For some investors, income stocks aren’t the most exciting opportunity within the financial markets. Those seeking to build wealth often prefer growthier businesses that can potentially send their stock prices surging. And that’s an uncommon trait among dividend-paying companies.
However, while dividends can look a bit boring at first, in the long run, they can evolve into something far more spectacular. In fact, looking at the total returns throughout history, dividends have been responsible for around three-quarters of all wealth created.
How’s this possible? And is 2023 a rare chance to kick off an income portfolio?
The perfect marriage
Dividends and compounding go hand in hand. By subscribing to a dividend reinvestment plan (DRIP) or just instructing a broker to reinvest any payouts received, the compounding process can speed up… a lot.
This is one of the main reasons why dividends can be so lucrative. After all, each time a company rewards its shareholders, they end up with even more shares. This leads to an even bigger payout next time around.
But this effect is amplified even more when successful companies expand their free cash flow. This enables them to raise shareholder payouts even higher. A 4% yield is a rough ballpark figure of what investors can expect from most income stocks.
Providing the firm doesn’t then cut dividends, this yield is now locked in. And firms with enough dry powder to weather economic storms, as well as offer products or services that are growing in demand, could have the capacity to raise their dividends substantially over time.
One example of this would be Safestore. The self-storage enterprise has hiked its dividends consecutively for more than a decade. It’s done so to the point where investors who bought in 2013 are earning more than 50% returns from dividends alone each year!
Income investing in 2023
It’s never too late to start an income-generating portfolio. And starting as early as possible, even if it’s with modest sums of capital, can have a profound positive impact in the long run. But 2023, in particular, is a special year. Why? Because we’re in the middle of coming out of a correction.
Stock market corrections are fairly common, occurring usually once every three years. Yet the downturn experienced in 2022 was so severe it triggered a new bear market for the first time since 2008. And looking through history, such periods of volatility are few and far between.
As frustrating as these are to endure, corrections create wonderful buying conditions. Stock prices end up in the gutter from panic selling, sending yields through the roof. Many of these will likely struggle to be maintained. But the few that succeed could put an income portfolio in the fast lane, cutting years off the journey to millionaire territory.
