Investing for dividends or investing in strong undervalued companies? Which one of these two methods is better? They are both extremely popular. One of these methods tries to find strong companies that are undervalued. The other involves buying stocks that are consistently paying off an income.
Which is the most profitable? Well each strategy has one big weakness and one big strength.
Value investing which involves buying strong companies whose stocks are undervalued has one major advantage. When you look at the long term results of this strategy it really does work. Companies that have excellent fundamentals will ususally beat average stock market return in the long term.
So checking things such as the PE ratio and the price to book ratio are very important ways of measuring how well a company will do in the long term.
There is one thing that value investing lacks however. Investing in strong companies is a long term approach. It is not something that you are going to see the results of in the next few months.
The real benefit of buying dividend paying stocks is that you are able to see some profits once you get into the stock, without waiting many years. Because stocks will pay a consistent dividend buying good quality dividend stocks helps to produce an income whether or not the stock goes up.
But there is one bad part about dividend investing, it can take a lot of money to be really profitable with it.
That is why the best long term strategy is probably not to simply buy a value stock or a dividend stock, but to combine the two. As a stock appreciates over time so does the dividend which means the income it produces also increases. In short each of these strategies is comes up short where the other is profitable.
It can take some time to get a plan like this to work. But it can be a very powerful long term way of saving.
Tags: Dividend Investing and Value Investing, Dividend Investing vs Value Investing