Whether you are a retired or starting your career, dividend stocks are a great thing to add to your investment portfolio. There are several reasons why you may want to invest in dividend income stocks, ETFs, and REITs.
What is a dividend stock?
A dividend stock is a share/stock that receives a small payment from the company they own. People often use the term “dividend stock” loosely because it can also be an exchange-traded fund (ETF) or real estate investment trust (REIT).
Looking for a list of dividend stocks? Read “Top 10 Dividend Stocks For 2020.”
Payments to the stock owners are typically paid quarterly but can be paid monthly, semi-annually, or annually. The amount varies from company to company and can be reduced or increased based on the board of directors for a company.
5 Reasons to Invest In Dividend Stocks
There are many reasons why to invests in dividend stocks, and it will vary from investors.
Here are my top 5 reasons to invest in dividend income stocks:
Reason 1: Passive Income
The first reason to love dividend investing is, of course, for the passive income that it creates. Now, I know passive income can be a tossed out word there, especially in today’s age with reality TV, YouTube, and people making shows about passive income.
But it truly is, in some form, a passive way to earn income. Because if you invest in companies and they are paying you money every single quarter or however often that they pay, that is money that you’ve earned for pretty much doing almost nothing.
There is considerable research that you have to do beforehand investing in dividend income stocks, but that is true of all investments. If done right, you’re making money by just having your money sitting in an account and having ownership of these different companies.
So this is an outstanding feature for a lot of people because if you can have money-generating for you every single quarter without having to do a lot of work. Honestly, that is one of my favorite things when it comes to it.
Not that I’m lazy. Not that I don’t want to work, but I also like having money working for me that I don’t have to put a lot of time and effort into Once I’ve set everything in motion.
Of course, this also means that when you are creating passive income, depending on when you do it, it can be a significant amount if you are focusing it over time how much you have in your account.
Now, one of the significant downsides when it comes to creating passive income with dividend investing is that it typically means a lot more capital to be able to generate a tremendous considerable amount of passive income.
If you are doing this over time, it won’t be a big deal. But if you are looking to generate that 3 to 4% income and need thousands of dollars every single month, you’re going to have to be putting in quite a bit of money to help generate that money coming in.
So for most people, it’s beneficial if you’re getting started early to help you build up your portfolio.
So your dividend income is just getting reinvested, which we’ll be talking about here in a second, as well as being able to one day in the future have money coming in enough to the point where it can pay your bills and take care of your financial needs.
Reason 2: Less Risk (If Researched)
So the next reason to love dividend investing is that typically it is a little bit less risky than other stocks. Now, this might sound weird because, of course, any investment that you’re doing is always going to be a risk.
But risk management is a huge factor when it comes to a lot of people and how they’re able to put their money into the stock market.
If you are putting your money into a lot of growth stock, that is going to have a higher potential for risk. That means there is going to be a lot more ups and downs, which can be a good and bad thing.
When it comes to dividend stocks, if you’re doing your right research, you’re typically going to be putting your money into what they call blue-chip stocks, which are mostly those more prominent companies like Walmart or McDonald’s.
These are companies that have been around for a long time and have been producing an excellent yield when it comes to their dividend.
Now, this last risk is because these companies are already massive, and they want to mitigate a lot of their own risk. So the companies typically pay back a higher yield on their dividend so that way, you can hold on to their stock even longer.
You want to be invested in because you have a higher history of knowing that they are paying on their dividends every single quarter or how often they pay.
Now we that doesn’t mean that there is no risk whatsoever, especially when we have downturns and markets. Of course, all stocks typically will be going down during those periods. So even if you’re invested in blue-chip stocks that have that doesn’t mean there is no risk whatsoever.
So always be paying attention to that aspect of it. But typically, if you are investing in blue-chip stocks or companies that have excellent histories when it comes to paying out dividends, you’re going to have usually less risk and have less volatility.
Reason 3: Reinvest Dividends
So the next reason to love dividend investing is that you can reinvest your dividends back into the companies that paid out those dividends. And this is probably one of my favorite things.
It is a great feeling to get paid out dividends and then reinvest those back into the companies to have more ownership because the more ownership you have of those companies, the more dividends are going to get paid out in the future.
So it is compounding, and the power that it actually will give you is essentially more purchasing power to have more ownership to have more dividends to get paid out for the future.
And it’s excellent, especially if you are at a younger age where you can compound all of those dividends over and over, and it continues to grow.
It can mean high payouts in the future. So that way, when you are retired or don’t want to work anymore, you can have that money coming in from dividends to be able to pay you at a much more considerable amount than if you just kept those dividends early on.
So reinvesting those dividends is a beautiful thing.
And it is so great to see the effects of actually putting your money back into the companies that already paid you out those dividends.
Reason 4: Tax Benefits
So next up on this list is going to be for tax benefits. Now, I am not a tax expert. So make sure you always get additional information from a tax expert on this information.
Still, when it comes to taxes on it, your dividends, you’re going to be typically taxed quite a bit less than you are with your regular income.
If, in the future, your goal is to have $2,000 every single month paid out in dividends. You’re going to be taxed less on that $2,000 than if you worked for somebody else or a company. Now, if you worked for a company and got paid out that $2,000 on a regular salary, you’re going to get taxed at a much higher rate.
There are some significant tax benefits of having ownership in dividends and getting paid out those and keeping it for yourself versus actually working for somebody else.
It is a pretty considerable difference anywhere from 10 to 25% difference in taxes that you will get charged for having dividends as your form of income.
And it’s a cool thing, and it’s something you want to look into and make sure you have all the right information so you can be adequately understanding of the tax codes because of course, it’s always crazy and wonky all over the place.
Now before we go on to the next one, make sure that you let me know in the comments down below.
Reason 5: Dividend Yield Increase
So the next reason why I love dividend investing is because of the dividend yield increase. Now, to break this down, I’m going to kind of go into a little bit of an example here to make things a little bit easier.
But the thing about dividend increases is that this means that you are making more money for doing absolutely nothing.
This can help you keep up with inflation. Because if inflation is going anywhere from two to 4%, you want to make sure that your money is potentially grow with you.
Otherwise, you are going to be losing purchasing power over time.
A lot of companies will try to increase their dividend payouts every single year. They want the dividend yield to stay consistent with their stock price.
If a companies’ stock price goes crazy high, its dividend yield will go down significantly.