Wednesday, June 14, 2006

Why Flat Stocks May Not Always Mean Flat Gains

When the market takes a nose dive (like it has in the past few weeks), it's a great time for bargain hunters to add to their holdings. Most of my retirement assets are invested in aggressive growth mutual funds. But when it comes to individual stocks, I take more of a long term, buy and hold approach. In short, I'm drawn towards the relative safety of large, well-known corporations that pay hefty dividends.

This afternoon, the Motley Fool published The Market's 10 Most Mediocre Stocks, an article that essentially validates my approach to stock investing. The authors explain why flat stocks (i.e., stocks that haven't increased much in terms of price), aren't really flat.

First, there are the hefty dividends that most large corporations pay to their shareholders. Second, if a shareholder reinvests the dividends, there's the larger ownership stake in the company, which translates into the potential for a greater reward when the stock price does tick upwards. "The greatest rewards will go to those who had regularly reinvested their dividends at the lowest prices. This is why Wharton professor Jeremy Siegel calls dividends a bear market protector and a return accelerator. Simply put, they can protect you from an unforeseen calamity." And in today's market, that's saying a lot.

So, just to give you an idea of the types of stocks that I'm talking about, I went ahead and bought some shares of Procter & Gamble today. It's a solid, diversified company that sells great products, including ones that I use on a daily basis. Do I think that the stock price will double in the next year or so? Of course not! But I'm counting on those nice juicy dividends to help offset some of my paper losses. And I'll be adding to my ownership stake by reinvesting those dividends.

1 comment:

mapgirl said...

YAY! Jeremy Siegel is one of my financial idols! I like buying on the 'dip' because it keeps your dollar cost average low, and it really does accelerate your gains. Would you rather make a dollar on a $10 buy or a $100 buy? That's easy. I'd rather make 10% than 1%. :-)