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 method attempts to get into stocks that are paying out a monthly income to their stock holders.
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. Undervalued companies with nice fundamentals normally do much better then the yearly average stock market return over the long term.
So checking things such as the PE ratio and debt to equity ratio is one way that can seriously improve the quality of a stock.
There is one thing that value investing lacks however. Investing for value is a very long term approach; you may have to hold a stock for 20 years or more to see any real kind of return off of that equity.
The best reason of getting into dividend paying stocks is that you are able to see some profits once you get into the stock, without waiting many years. Because of the dividends they produce some stock can be very profitable even if they do not appreciate.
However dividend investing has one big pitfall of its own, it takes a lot of money to make money.
Combining these two strategies is probably a much better option then just doing one. 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.
