Long before the advent of the stock market, the ancient Greeks had a story about the benefits of long-term investment options.
Hard to believe, right? How could there be tales of long-term investment options thousands of years before there was even a stock exchange? Sure, we have the philosophy of Plato and the enduring theater of Sophocles. Some modern architecture still references Greek styles, and the mathematics of Pythagorus and Euclid are important to this day.
And then there’s Aesop. While there’s some debate over whether or not Aesop was a real person, you’ve certainly heard his fables time and again: The Wolf in Sheep’s Clothing, The Ants and the Grasshopper, and The Lion and the Mouse are some of the most famous. What you probably didn’t know, however, is that one of those fables is about long-term investment options. Any guesses?
If you guessed The Hare and the Tortoise, you are absolutely correct. In case you need a refresher, the fable is about a hare that is making fun of a tortoise for being so slow. The tortoise challenges the hare to a race, and once the hare is well ahead, he stops to take a nap. The tortoise, slow and steady, passed the sleeping hare and went on to win the race.
Why long-term investment options are the steady and sure road to building wealth
How is that related to long-term investment options? Well, are you a hare or a tortoise when it comes to your investing strategy? Do you turn over your portfolio an average of once a year, twice a year or a dozen times a year? In this age of super-fast computers that are programmed to trade in nanoseconds (one-billionth of a second), should we trade more often to keep up with the ever-changing stock market?
Our opinion is no—more trading does not improve your returns. Holding stocks long-term does. In fact, the data and multiple studies seem to suggest that the longer you hold your stocks, the larger the profit.
Add to that the fact that a lot can change over time on Wall Street—and usually for the better. After all, the average annual return for the S&P 500 is 9.8%. So buying and holding stocks for five, 10, 15, 20 years is a good way to make money. For those who are patient, a lot of good things can happen. Quadruple-digit returns. Triple-digit returns. Slow and steady wins the race!
And holding stocks long-term has another benefit—dividends! A company’s ability to continually pay dividends provides concrete evidence that the company is performing well. Also, rising dividends indicate that management and the board of directors expect the company to perform well during the next several years.
Dividends have always been a huge part of stock market investing. In fact, between 1930 and 2018, dividends represented nearly half of overall market returns (about 43%). Prices go up and down and sideways, while dividends keep rolling in no matter what.
That’s why we say dividend stocks have been one of the most successful wealth building investments in history. Few people know this. In fact, a lot of people regard them as boring.
But dividends give you even more wealth when you reinvest them. Reinvesting dividends has a compounding effect on an investment, delivering jaw-dropping returns over time. Reinvested dividends buy more shares of stock. More shares of stock pay still more dividends. And if the dividends grow and the stock price appreciates, the returns can be astounding.
Where to find long-term investment options
There are specific corners of the stock market that provide high dividend yields. Income investors looking for above-average yields should consider investing in Real Estate Investment Trusts, also known as REITs. Many REITs have high dividend yields, and even better, REITs are among the biggest beneficiaries of declining interest rates.
One of the generally accepted wisdoms over the past couple of years has been that the U.S. stock market is where the action is. But relative performance of ex-U.S. markets is showing that’s no longer the case. There are market-beating returns available to those investors willing to step abroad. And one of the easiest steps to take is just over the border with our neighbor to the north, Canada. For the modestly adventurous investor, there are quite a few Canadian blue-chip stocks worth a look.
Bear in mind, however, that the first thing to consider regarding a high dividend, or any dividend for that matter, is whether it is safe and sustainable. Often times, a yield becomes high because the stock price has fallen considerably. A stock price usually falls because of poor operational performance, which imperils its ability to sustain the dividend.
It is generally not wise to be allured by a 8%, 9% or 10% yield on a stock that will have difficulty maintaining the dividend and is less likely to grow it. Over time, you should fare much better with a more modest high yield on a company that can sustain the payout and likely grow it over time.
If you feel ready to explore dividend stocks, but need some additional guidance and suggestions, download our FREE report, The Five Best Dividend Stocks to Buy Today.
What do you find most concerning about long-term investment options? Share your thoughts in the comment section below.