Are dividend-paying stocks superior to regular stocks for long-term investments?
I want to invest for my retirement 10 years away. Are dividend-paying stocks superior to regular stocks for long-term investments?
Dividend stocks are a great way to invest, but you will find that there are numerous ways to make money. With retirement 10 years away you will want to look at your tax situation along with picking the correct investments. For example, since you are most likely not using the income from your investments you will want to minimize your current taxes if your stocks reside outside a tax deferred account. Dividend stocks are not as tax friendly as those that do not pay a dividend since you have to pay taxes every year on all the income they produce.
Next, you want to do your research to make sure you are picking the right stocks regardless of whether it is dividend paying or not. GE is a great example of a long term dividend paying company that appeared safe. It has cut the dividend numerous time and lost money in a generally strong market for stocks.
Lastly, I would suggest taking a look at companies that pay smaller dividends but have higher dividend growth as a way to start your process for finding companies.
Dividend paying stocks are neither superior nor inferior for long-term investing. There are time periods when dividend paying stocks have done better and times when they have underperformed growth stocks or the market. Generally, there is the fallacy that dividends are free money (am not suggesting that you fall into this camp), by which I mean that many investors strictly buy dividend stocks to get the dividend "bonus". Dividends aren't a bonus, nor are they free money, rather a dividend is simply a transfer of wealth from the company's books to the shareholder. What does this mean? Well, when the company pays out the dividend, its book value drops by the amount of the dividend. Since the stock price will depreciate by the vaue of the dividend payout, your account balance will remain the same immediately post-dividend (except now you'll own more cash).
Going back to your question, when dividend stocks do well, it may not be because they pay dividends. It happens to be that dividend stocks are typically value stocks, rather than growth stocks. And it's been shown that over the very long term, value stocks have done better. Value is one of the identified "factors" or "dimensions" of higher expected returns. Also, dividend stocks may also sometimes be more profitable than non-dividend paying stocks. Profitability is another factor or dimension of higher expected returns. It could actually be that profitability is the underlying reason why dividend stocks do better. So, perhaps the dividend payouts aren't the direct reason at all why those stocks tend to sometimes do better.
In my opinion--backed by data, peer-reviewed research, and real-world evidence--picking sectors or stocks based on expected future outperformance is extremely difficult. No one has a crystal ball or magical powers to forecast what tomorrow will bring. Your best bet is still sticking with a globally diversified portfolio of low-management fee index funds (or etfs). Good luck.
Historically, dividend stocks have outperformed non-dividend paying stocks. Additionally, dividend-paying companies tend to be more established and more stable because they've designated a certain amount of anticipated future cash flow for those dividends.
Here's the article that shows their outperformance > https://seekingalpha.com/article/3997749-dividend-stocks-outperform
Make sure, however, that the due diligence you perform on picking stocks is more than just looking at the dividend. Also, make sure that you are not allocating too much of your portfolio to these stocks.
I hope this helps!