Don't Forget the Only Reason to Invest

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By Chuck Saletta

There is exactly one reason to invest: To turn a little cash today into more cash tomorrow, or next year, or 10 to 20 years from now. You get the point.

Now, there are two ways to make money in the market:

1. Capital appreciation.
2. Dividends.

You can try to do one with the other, sure, but your earning power is significantly enhanced if you put the two of them together.

The thing about ...
The problem with chasing capital gains and only capital gains is that you need to be right twice with every investment you make. To buy low and sell high, you need to know the right price at which to buy and the right price at which to sell.

It may sound easy, but it's not.

The problem with chasing dividends and only dividends is that yields on annuities tend to be very low (between 4% and 6%). If you hold these investments over long periods of time, you're quite likely to lose the purchasing power of your savings to inflation.

When you combine the chance at capital gains with dividends, however, then you start cooking with gas.

The big win
When you get serious about dividends, you'll likely find that you're much better at stuffing your portfolio with stocks you may never have to sell. That's because dividend-paying companies will reward you each and every year, and a rising payout along the way would indicate a firm that remains in good long-term health.

As a result, you only have to be right once. That's at least 50% more likely.

Best of all, when all is said and done tomorrow, next year, or (more likely and more accurately) 10 to 20 years from now, you could very well get back more than you initially invested and still own the companies that paid you those dividends.

This chart shows the power of owning solid dividend-payers for two decades:

Company ............................................Price(1987).....Dividends (1987 to 2007).....Price in 2007
Anheuser-Busch (NYSE: BUD)..........................$7.91..............$11.93................................$52.85

Merck (NYSE: MRK))..................................$8.68..............$21.64................................$58.71

Automatic Data Processing (NYSE: ADP)).........$5.45..............$11.48................................$44.71

Illinois Tool Works (NYSE: ITW))....................$3.72..............$6.62................................$54.04

Lowe's (NYSE: LOW)).................................$0.53..............$1.07................................$22.66

Wal-Mart (NYSE: WMT))...............................$3.20..............$4.87................................$48.08

Nucor (NYSE: NUE))..................................$2.43..............$6.35................................$60.85

Values split-adjusted where applicable.

Remember why you invest
Over time, with dividend-paying companies, you can:

1. Make an investment
2. Get more than your total invested capital back
3. Still own the business that generated your wealth.

If you invest to wind up with more cash at the end than you had when you started, there's simply no better place to look than at stocks that pay dividends.

Source:
http://www.fool.com/investing/dividends-income/2008/01/04/dont-forget-the-only-reason-to-invest.aspx

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