Why You Should Consider Investing in Shares with Dividends
Contents
- The Basics of Dividends
- How to Invest in Dividend Stocks
- Reasons to Invest in Dividend Stock
- Pros and Cons of Investing in Dividend Stocks
- Conclusion
Dividend stocks pay investors every quarter and the best ones increase their dividend pay-out over time. Thus, they offer investors a great opportunity to build annual cash streams.
The Basics of Dividends
Dividends are popular among investors who want a steady stream of income from their investments. Since some companies choose to distribute profits with their shareholders, these distributions are known as dividends. They are often issued in cash or additional shares of the company. Moreover, they can be paid even if the company doesn’t make any profit. Most do so on a monthly, quarterly, or annual basis, partially to entice existing shareholders to keep their shares.
They come in two forms: regular and special. Regular dividends are dividends that are paid out in regular intervals. Often companies that pay regular dividends are sure that they will be able to maintain paying them or at least, increase them. On the other hand, special dividends are dividends that are paid out after particular milestones are achieved. They are usually one-time occurrences. For instance, if a company surpasses earnings expectations or sells off a business unit, it may choose to pay special dividends to its shareholders.
How to Invest in Dividend Stocks
There are two ways to invest in dividend stocks: through exchange-traded funds or purchasing individual dividend stock.
- Investing in Dividend Stock via ETFs: Just like stock ETFs, dividend ETFs offer a straightforward solution to getting exposure in a specific investment niche- dividend paying stocks. Additionally, ETFs include dozens of dividend stocks. Therefore, they provide you with instant diversification which minimizes your overall losses if stocks cut their dividends.
- Investing in Individual Dividend Stock: It’s more complex than investing via ETFs as it takes more time and effort. However, by buying individual dividend stock, you have the power to personalize your portfolio and potentially find higher paying dividend stocks than in an ETF.
Reasons to Invest in Dividend Stock
- Possibility for Higher Returns over Time: Unlike regular stocks, dividend stocks are more than just change in stock prices. There is dividend yield which means that with the right kind of stocks, you can enjoy strong returns.
- Dividend Stocks are More Stable: Often, most companies only pay dividends when they have profits left over to share. When it comes to high yield stocks, companies that pay a stable dividend are often stable companies, which perform solidly over time.
- You Receive Pay-Outs, Even in a Down Market: Unlike regular stocks that depreciate in value during a market downturn, dividend paying stocks keep on paying their dividends until they have to cut their payouts. These offers great peace of mind for investors practicing dividend investing.
- You Can Build Wealth Faster: If you are not in need of your dividend yields for some time, you can reinvest your dividends to help boost your wealth. A great way to do this is to use dividend reinvestment plans (DRIP). A DRIP allows you to get paid in shares instead of cash dividend.
- Dividend Stocks are most likely to recover from a Downtrend: In a bear market, nearly every stock loses its value. However, with shares that pay dividends, continuously, there is a greater chance of recovery at the end of the bear market.
Pros and Cons of Investing in Dividend Stocks
Pros
Reliable Income Stream
Investing in dividend stocks provides a reliable income stream comparable to other forms of investing such as bonds or real estate. That is, they pay on a set date that can be predicted in advance. Since investors with dividend paying stocks know when their pay-outs are due, they can provide a steady source of income which can potentially replace their employment income.
Insulation from Stock Market
The stock is market is extremely volatile and hardly any investor can predict it with any accuracy. Thus, the main advantage of dividend paying shares is that they insulate the investor from the stock market.
Cons
Difficulty Picking Stocks
The metrics of dividend growth are not connected to the metrics of dividend payout. For instance, a company may consider launching a new project that it believes will be a success. Thus, the company may cut its dividend payouts in a bid to fund the project, which leads to a massive decrease in dividend payouts.
Conclusion
Investing in shares with dividends gives us a great opportunity to beat inflation. However, this approach should not be approached lightly. Investors should ensure that they take a considerable amount of time and research in finding the best dividend shares. Furthermore, the same risks of investing are applicable even with dividend shares. Therefore, it’s critical that you understand all the basics of dividend investing if you wish to survive this market.
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