Every investor follows a specific set of rules or behaviors that guide them to make life decisions. Taking an investment decision is no different. To take the right investment move, one has to know different aspects such as their financial goals, risk tolerance, and timeline.
Understanding basic investing strategies and choosing the right one that fits you, can help you achieve your financial goals. Dividend investing is one such strategy where investors buy stocks of companies that pay dividends, giving them a steady or regular income from their investments.
According to LearningBull, a dividend is a cash or stock payment that a company issues to its stockholders from its earnings. It is like a ‘thank you note’ from companies for holding their stocks.
Many investors consider dividend investing as a safer investment strategy, as it provides a stream of income apart from stock price appreciation.
Here are some benefits of dividend investing:
1. Provision of a steady and reliable income stream
Good dividend paying companies provide dividends on a fairly regular basis. The dividend payment is fixed and every investor who holds shares of the company receives it. This helps investors to create a stable stream of income. You can either reinvest your dividends or spend it according to your choice.
According to Sure Dividend, investors cannot predict the gains in the stock market as stock prices fluctuate. There are high chances that subsequent losses will offset your gains.
On the other hand, dividends can be a source of income. This feature of dividend investments is very attractive to the older generation or retirees who are looking for an extra or supplemental income.
2. Invest in more stable companies
Issuance of dividends indicates the overall good health of the company. It shows that the company is profitable to issue dividends to its investors. Most startups or small-cap companies don’t pay dividends.
Typically, large well-established companies pay dividends. As these companies are market leaders in their respective sectors, the chances of incurring a terrible loss are negligible. You can also say that after a company decides to pay dividends, it becomes more accountable and the management is less prone to making mistakes.
3. Reduction in risk
The common notion that investing in the stock market is risky is true but as long as you make smart investing decisions, this risk can be reduced. Before you plan your investment portfolio, the most important factor to weigh in is the amount of risk you can handle.
It makes sense to invest in small-cap or growth stocks that have the potential to grow over a long period if you can handle high volatility and fluctuations of the stock market.
If you cannot handle this kind of risk, then dividend stocks can be a great option.
4. Dividends offer tax benefits
Dividends can be divided into two categories, qualified and unqualified or ordinary dividends. While ordinary dividends are taxed as regular income, qualified dividends are taxed at a lower rate.
In a qualified dividend, if you hold a company’s stock for over 60 days (in most cases), then your investment is treated as long term capital gains and you are taxed accordingly. This makes investing in dividends very tax efficient.
5. DRIP (Dividend Reinvestment Plan)
Dividend Re-Investment Plan allows investors to re-invest in their cash dividend payments into additional or fractional shares. DRIP can be very beneficial for investors as it allows you to hold more shares without having to pay commission on it, and some companies also offer shares at a discounted rate through DRIP.
According to Investopedia, between no commissions and a price discount, the cost basis for owning the shares can be significantly lower than if you purchased the shares on the open market. Through DRIPs, investors can also buy fractional shares, so every dividend dollar is really going to work.
6. Dividends during inflation
During periods of high inflation, your income may not keep up with inflation. But many dividend-paying companies belonging to consumer goods, utilities, or energy sectors make higher profits during high inflation as their pricing power rises.
And if the government increases the interest rate, banks stand to gain at the time of inflation. This results in higher dividend payments by the company, and unlike other investment vehicles, dividends perform better during inflation.
7. Benefits during Bear Market
At the time of a bear market, stock prices keep falling, which may lead you to incur a loss. Regardless of the situation, dividend-paying companies continue to pay dividends, which can help you in compensating for that loss.
Summary: Dividend investing is a great investment strategy for investors. The strategy reduces the overall risk in the portfolio and works well during high inflation and a bearish market. Pick up high dividend-paying stocks if you are looking for an additional source of income.