Want a piece of a company’s profits? Invest in dividend stocks. While they aren’t the most ‘exciting’ stocks on the market, they provide a steady stream of income and a nice addition to your portfolio.
Dividends are great for retirement, but they aren’t just for investors about to enter their golden years. In fact, the younger you are, the stronger the reason to invest in dividend stocks – you have even more time for your funds to grow, especially if you take advantage of Dividend Reinvestment Plans.
Have you avoided dividend stocks thinking they weren’t worth it or are too confusing? I used to be in the same boat and then I checked out dividend stock investing and I’ll never turn back.
Check out the top 7 reasons I think you should reconsider too.
1. Dividend Stocks Create Income
When you own stocks, the only ‘real’ cash you receive is if the company pays dividends. Dividends are ‘real’ income you receive quarterly, semi-annually, or annually depending on the company.
You receive dividend income when it’s distributed. Without dividends, you only receive capital gains, when you sell your stock and no longer have an investment. Stable companies pay dividends regularly IN ADDITION to the share growth. You earn dividends (get your payouts or reinvest) and keep your investment in the stock, enjoying its growth over time.
Even with no share growth, though, dividends provide income. If you reinvest the dividends, you grow your investment without investing any additional funds of your own. It doesn’t get much better than that. It’s like using your home’s equity to fix up your home and increase its value – it just makes sense. I see people talking about passive income all the time, but they tend to skip the benefits of dividend income – the pillar of passive income.
2. Dividend Stocks aren’t Boring or Low Return, They are Predictable and Mature
Stable, mature companies offer dividend stocks. No, they aren’t your volatile small-cap stocks that keep investors on their toes, but they offer predictable returns that grow over time.
Stable companies, like ExxonMobil and Proctor & Gamble, for example, have had regular payout increases in their 30+ year history. Even if the dividend yield is only around 3%, that’s 3% you earn for doing nothing.
If you have $50,000 invested, that’s a return of $1,500 annually. If you reinvest the dividends, you increase your investment in stable companies, enjoying their ongoing growth and stability through the years. All for doing nothing.
3. It’s Easy to get Started Investing in Dividend Stocks
Investing in dividend stocks isn’t hard. It’s actually easier than day trading.
Because you invest in companies with a rich and stable history. You aren’t looking for newcomers breaking into the market and offering volatile returns. Do your research, finding companies with stable earnings. Researching well-established companies is a lot easier (and more pleasant) than trying to track down information on newcomers.
Look at historical quotes – paying close attention to the dividend payouts per share. Open a brokerage account at your favorite broker (M1 Finance is one of my favorites) and start investing.
Want a head start on a few good companies? Check out International Paper (IP), National Health Investors Inc (NHI), and Principal Financial Group (PFG).
4. You can Invest in Fractional Shares
You don’t have to be rich to invest in dividend stocks. Want to invest in Apple (AAPL) or Microsoft (MFST) but don’t have a lot to get started? Buy fractional shares and earn a prorated return in dividends too. It’s a great way to start investing in some of today’s hottest companies even if you can’t buy a full share.
Not sure how to invest in fractional shares, how to manage your portfolio, or where to start? Check out M1 Finance, the next generation fintech helping you to take advantage of technology and automating your portfolio. I currently use it for all my dividend stock investing and love how you can invest, borrow, and spend using it. All I did was answer a few questions about my risk tolerance and goals, and M1 Finance did everything else.
5. Dividends Often Grow
Companies paying dividends are working hard. They want to grow and earn money for their own profits and to pay their stockholders.
You aren’t investing in a fly-by-night company that may or may not be standing in a year. Instead, you invest in long-standing companies that have a plan. If you do your research and focus on companies with historically growing share prices, your dividends will grow right alongside the share growth. This is my favorite part of dividend stock investing – choosing companies I know will grow and do good for the community and my wallet.
6. Dividend Stocks Give you a ‘Sure Thing’
It’s no secret that the market is volatile. It’s also no secret that emotionally-based investment decisions are a bad idea. In fact, jumping ship when the market falls is a bad investment decision in most cases. Riding the rollercoaster usually provides the greatest returns.
Owning dividend stocks gives you that reassurance you need to ‘stick it out.’ Even when share prices fall and you can’t bear to look at your portfolio, knowing you’ll still get a dividend payout with a nice windfall each quarter, may help you stay the course rather than bailing at the worst time.
7. Dividends Limit a Company’s Spending
We’ve all seen companies make financial decisions that make us scratch our heads. Dividends limit bonuses and unnecessary salary increases. In other words, they prevent lining the pockets of the executives when they could be paying the investors.
Knowing a company has dividend investors to answer to keeps companies more accountable and stops them from lining their own pockets or letting the cash spur unnecessary spending sprees that end up costing the company money and investors to lose their shorts.
Include Dividend Stocks in your Portfolio for Great Returns
Look for high dividend-yielding companies. 5% – 6% yield payouts are a great place to start. Look for not only high payouts but consistent payouts too. Not all companies offer them and not all companies are created equal.
With the right strategy, you can maximize your investment, grow your portfolio, and set yourself up for a decently sized passive income no matter how the stock itself performs.