Why dividend stocks make the best investments

When most people conduct stock analysis, a common conclusion they come up with is that a dividend stock is much safer, but does not offer higher returns. This is not completely true. Basically, dividend stocks are not as volatile compared to non-dividend paying stocks. A logic that is completely false is that a dividend stock offers lower returns. Historically, dividend stocks have considerably outmatched non-dividend paying stocks. Over the last four decades, the majority of gains in the stock market have come from stocks that pay dividends. There are various reasons why businesses that pay out dividends outmatch those that do not.

Basically, dividend paying companies do better in the stock market because they are mostly profitable. It is this profitability aspect that makes the companies pay dividends, basically. Secondly, these companies outperform because they are generally proven companies and thirdly, the companies reward their shareholders. For such reasons, one can only conclude that dividend stocks simply make the best investments. However, this is not entirely the correct picture. Some dividend paying stocks perform better compared to others. When an investor focuses on high-quality dividend-paying stocks that are trading at better or fair prices, the investor can systematically establish a portfolio of high-quality companies when they are ready for investing.
The reason why most investors think that dividend stocks do not offer higher returns is because they do not invest in the right businesses or do not invest in high-quality dividend stocks. It should be understood that the process of choosing and investing in only high-quality dividend-paying stocks is not easy. Worse yet, investors are flooded with cognitive biases, which prevent them from making logical decisions with small amount of information on dividend investing available. Cognitive biases happen not just in investors, but with hedge fund owners, investment advisors, financial advisors, newsletter writers and mutual fund managers among other professionals.

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