The investment world is generally divided into two categories – growth investing, and dividend investing.

Many investors prefer to park their money in growth stocks that can help to lift the value of their portfolio to better prepare themselves for retirement.

However, growth stocks are generally more volatile and may also come with higher risks.

The recent market turmoil, which saw the NASDAQ Composite Index enter a correction, is a prime example.

Dividend stocks can shield you from this volatility and allow you to sleep well at night.

Here are three key reasons why you should include such stocks within your portfolio.

A guaranteed return

Simply put, a dividend received is considered a guaranteed return.

In comparison, gains enjoyed from share price movements called “capital gains”, are not recognised until you sell the stock.

Hence, such gains may evaporate should the market stumble and fall sharply, which is what happened recently with the US technology stock index.

On the other hand, dividends once declared and paid out by companies, form a part of your permanent return that cannot be taken away from you.

These dividends also add to your cash stash and help to boost it in preparation for deployment into attractive bargains.

It is these dividends that can help you to sustain your cash flows while the market is crashing, enabling you to have the cash flow to continue buying.

Do not dismiss how important this is as many investors may feel compelled to sell their holdings at huge losses just to raise cash to buy bargain stocks.

With dividends to boost your cash holdings, you have an additional option to rely on for buying stocks at better valuations.

A strong track record of free cash flow generation 

Many companies that pay consistent dividends also have a solid track record of free cash flow generation.

This attribute is important as such businesses will be less reliant on banks and financial institutions to support their operations.

Take Boustead Singapore (SGX: F9D) for instance.

The engineering firm has been paying dividends since fiscal 2003 (FY2003) and most recently paid out an annual dividend of S$0.055 for FY2024, a 37.5% year-on-year increase over the S$0.04 paid in the previous fiscal year.

A quick look at Boustead Singapore’s financials shows that the group has generated consistent free cash flow over at least the past four fiscal years.

Then there’s VICOM Ltd (SGX: WJP).

The test and inspection specialist has consistently paid a dividend for more than a decade.

For 2024, VICOM paid a total annual dividend of S$0.058 versus the previous year’s dividend of S$0.055.

For both 2023 and 2024, VICOM generated healthy positive free cash flow.

Singapore Exchange Limited (SGX: S68), or SGX, provides a third example.

The blue-chip bourse operator has paid out a dividend for more than 20 years since its IPO back in 2000.

SGX also generated healthy positive free cash flow in the last two fiscal years (FY2023 and FY2024) as well as for the first half of fiscal 2025 (1H FY2025).

With consistent free cash flow generation, investors can also rest better at night knowing that such businesses won’t be adversely impacted by interest rate movements.

Sturdy balance sheets

The third key attribute that many dividend-paying stocks has is a sturdy balance sheet with either no debt or little debt.

VICOM has no debt on its balance sheet and neither does HRNetGroup (SGX: CHZ), a provider of human resource services.

HRNetGroup has paid out an annual dividend of S$0.04 per share over the past four years despite enduring tough macroeconomic conditions that impact its profitability.

Haw Par Corporation (SGX: H02) is yet another reliable dividend payer.

The healthcare player, which owns the famous Tiger Balm brand, has paid dividends since 2010 and raised its annual ordinary dividend to S$0.30 in 2018, and then to S$0.40 in 2023.

Haw Par’s balance sheet had S$889.2 million of cash and short-term investments for 2024, a 17% year-on-year increase over the previous year’s S$760 million.

Debt was negligible at just S$36.3 million.

Hence, the conglomerate was able to not just pay out its regular annual dividend, but also declared a surprise special dividend of S$1 per share.

These examples show that a sturdy balance sheet is important in helping the business to weather tough macroeconomic conditions.

With significant cash reserves, a business may also choose to pay out a special dividend (case in point: Haw Par) or conduct share buybacks to enhance shareholder value.

We’ve just released a new Special FREE Report: “How to Make Your Child a Millionaire.” It’s a simple, no-nonsense guide for parents who care for their child’s financial future. You’ll also find 3 stocks (one even had a 55.8% jump in dividends) you can consider today to kickstart your child’s “piggy bank.” Click HERE to download now.

Follow us on Facebook and Telegram for the latest investing news and analyses!

Disclosure: Royston Yang owns shares of VICOM, Boustead Singapore, and Singapore Exchange Limited.