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building new portfolio
#11
That’s where investing in high-quality stocks that provide dividends come in. There are two ways you can make money on a stock: capital appreciation and dividend yield. Capital appreciation is the increase in the share price and the dividend yield is what the company elects to pay out annually. For example, if a company’s share price increased five percent in 2015 and paid an annual dividend of five percent, the annualized return would be 10%. Adding high-quality dividend stocks to your retirement portfolio is the best way to ensure consistent growth.

Since 1926, dividends have contributed nearly a third of total equity return, while capital gains have contributed approximately two-thirds. By ignoring high-quality dividend stocks, you could be ignoring additional gains of 33%. That number gets significantly higher when you factor in compounding.

When it comes right down to it, investing in dividend yielding stocks is more about common sense than finding under-the-radar stocks. That is, look for places where people spend their money when times are good and bad.

If you think the U.S. economy is moving in the right direction, look for consumer discretionary stocks (restaurants, furniture, automotive). If you think the economy is facing headwinds, look at defensive plays—those dividend stocks that make products we use every day (toothpaste, soap, shampoo, cigarettes, etc.).

These kinds of companies have relatively stable stock prices which makes them easier to buy and hold. That’s part of the joy of investing in big blue-chip dividend stocks; it doesn’t require a lot of monitoring.

That doesn’t mean you ignore your portfolio, but it means you probably don’t need to check in three times a day. That’s because businesses that report consistently higher earnings and increase their dividends clearly have a competitive advantage, one you expect will continue.
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