We’re four months into 2023, and I continue buying dividend value stocks. While I’m not spending as much money on stocks this year when compared to last year, I am spending a fair bit of money on them. My biggest investments this year have been term deposits (GICs), but dividend stocks have been a close second. I took advantage of the March 2023 banking crisis to buy some bank stocks cheap, and I bought some exchange-traded funds as well.
In this article I will explain why I continue buying value dividend stocks in 2023.
Value dividend stocks establish cash flow
One of the things I like about dividend stocks is the fact that they provide regular cash flows. You can make money on any stock if you sell it at a high price, but with dividend stocks, you have the opportunity to make money without selling at all.
Consider Toronto-Dominion Bank (TSX:TD) for example. It’s a dividend stock with a 4.68% yield. Invest $100,000 in it, and you’ll get $4,680 in cash back each year. Invest $1 million in it, and you’ll get $46,800 in cash back each year; that’s enough money to live on!
Now, of course, you need to have reasons to invest in a particular stock that go beyond just it having a dividend. Stocks that pay dividends sometimes have to reduce or even cancel them; when that happens, you don’t have any cash flow at all.
So, why do I like TD Bank stock?
First, it’s a relatively fast-growing bank, having grown its revenue at 7% compound annual growth rate (CAGR) and its earnings at 8.8% CAGR over the last five years.
Second, it’s a bank with conservative lending practices, which means that it doesn’t take unreasonable risks like the ones that got U.S. banks into trouble two months ago.
Third, it has a big presence in the U.S. market, where its growth has been extremely strong. TD is already the ninth biggest bank in the United States; if it closes its pending First Horizon deal, it will become the sixth biggest. First Horizon will add over $1 billion a year to TD’s earnings if the deal closes.
Dividend stocks outperform
In addition to establishing regular cash flow, dividend stocks, by some metrics, outperform the stock market. TD Bank, for example, has vastly outperformed the TSX index over the last 20 years. Likewise, Dividend Aristocrats — stocks that have 25 years of dividend increases under their belt — have outperformed the S&P 500.
This isn’t to say that dividend stocks necessarily always outperform. To the contrary, some of them perform very poorly. But these stocks collectively tend to perform pretty well, which is better than can be said for most categories of stocks.
Foolish takeaway
As we’ve seen, there are many good reasons to invest in dividend stocks. They produce regular cash flows, they perform well — what’s not to love? Of course, you can’t just run out and buy any random dividend stock, because it has a high yield. As always, you’ll want to make sure that you invest in good stocks, or even buy the entire market in the form of index funds. One thing is sure, though: dividends can help you achieve your financial goals.
