Dividend-paying stocks are those that pay shareholders part of the company’s profits, proportionate to the amount of stock they own. All kinds of stock have pros and cons, but with dividend stocks the advantages are significant, as long as the company is profitable. When a company is paying great dividends, there are lots of good reasons to invest.
Just as normal stocks do, dividend stocks change in value as the share price rises or falls. However, there’s a second way to make money off these stocks, as the company pays you a portion of its profits, typically quarterly or sometimes annually.
This provides you with a kind of cushion against falling share prices, too. If the company’s share prices fall over the dividend period, the fact that you’re still receiving a dividend means your investment loss is smaller overall. And the fact that you’re still receiving a financial benefit makes it much easier to continue with a long-term investment plan, rather than selling when share prices take a tumble.
When you buy shares in a company, any profit you make is on paper only, up until the point at which you sell them. The profit shows up on your financial statements, but it’s profit that you can’t spend or earn interest on. You have to sell those shares in order to realise any gains you’ve made on them.
This isn’t the case with dividend stocks. The money you receive from dividends every quarter isn’t just on paper, it’s real money that doesn’t disappear if the market takes a down-turn.
Dividends also provide you with passive income. Once you’ve invested in dividend shares, there’s nothing else you need to do in order to receive your quarterly dividend payments. Buying these shares is therefore a good way to realise a long-term income boost, or ultimately even generate enough income to live on independently.
Compounding is the practice of reinvesting what you earn from asset investment. Dividend stocks provide you with the ideal means of doing this, as all dividend payments give you the option to reinvest the money back into the company. Over time you can build up a substantial number of shares. It takes time and patience, but in the long term you have the potential to generate a significant amount of wealth.
One significant advantage that dividend stocks have over most other means of investing is that there’s a better chance that dividends will keep up with the rate of inflation. When prices rise, profits typically increase too, which means that dividend-paying companies are able to increase the dividends they pay out.
This is a particularly important consideration if you’re building a portfolio with the objective of providing long-term or retirement income, as inflation can easily wipe out your investment earnings if those investments are not able to keep up with a higher inflation rate.
