Top Reasons Why Young Investors Should Buy Dividend Stocks

This article outlines the top reasons why dividend-paying stocks are ideal long-term investments for young investors, even if dividends are reinvested instead of spent.

Take Advantage of Time and Compounding

One of the biggest advantages younger investors have is their long time horizon until retirement. Investing early in dividend-paying stocks allows decades for the power of compounding to work its magic through reinvesting dividends. Even investing modest initial sums at an early age allows that income stream to snowball into a substantial portfolio over time.

The earlier dividend stocks are purchased, the more time and compounding those rising dividends have to turn even small initial investments into exponentially growing income streams. Delaying means lost years of compound growth.

Benefit from the Company's Underlying Growth

Quality dividend-paying companies tend to be mature, established, and financially stable. Their business growth over decades often leads to steadily rising dividends over time as earnings expand. By owning shares earlier in that cycle, young investors have the opportunity to participate in the compound growth of both the business and its dividend income.

For example, Microsoft has increased its dividend over 600% since initiating one in 2003. Johnson & Johnson has delivered 56 consecutive annual dividend increases. Investing in enduring brands allows benefiting from both share price appreciation and rising passive income.

Gain Market Outperformance

On average, dividend-paying stocks have historically outperformed the broader market over time. This provides higher total returns for long-term investors. From 1972-2021, the S&P 500 Dividend Aristocrats Index delivered over 10% in average annual returns compared to the S&P 500's under 10% returns over the same period.

These higher total returns lead to greater portfolio gains, multiplying the power of compounding. The outperformance of dividend payers is likely to continue given their financial strength and consistent income.

Protect in Down Markets

Mature dividend-paying companies tend to be less volatile than high-flying growth stocks, with smaller drawdowns during market declines. The passive income provided by steady dividends also helps cushion stock portfolios against falling stock prices during downturns or crashes.

For example, in the 2020 bear market, dividend stocks in the S&P 500 fell significantly less than the overall index. The stability of dividend payers provides ballast especially in weaker markets.

Teach Investing Skills

Managing your own portfolio of dividend growth stocks teaches critical lessons about investing discipline, consistency, and income generation. Researching stocks, monitoring dividend coverage and payout ratios, tracking dividend hike announcements, and managing a rising income stream teaches skills and accountability.

Starting the process of intimately managing investments early allows developing skills, resilience, and mental toughness that enable success as an investor over a lifetime. Investing in dividend stocks provides ideal hands-on education.

Conclusion

With patience, consistency, and reinvesting their rising dividends from early on, young investors are well-positioned to allow dividend stocks to offer an excellent means to build significant wealth over their long time horizon until retirement. The combination of rising income, share price growth, and stability rewards those who start building their portfolios early around a foundation of quality dividend payers.