In these uncertain economic times, investing your money into more stable options is a good idea. Dividend stocks can be a very wise choice for several reasons. A dividend stock pays its shareholders when there is a profit or surplus. Typically, part of that profit or surplus will be reinvested into the company, and the other part distributed to shareholders either quarterly, or in some cases annually. Dividend stocks tend to either be cash dividends (you receive cash), property dividends (you tend to receive physical assets or shares instead of cash), or one-time dividends (you receive a tax-free payout of your investment capital).
If you choose the right dividend stock, there are numerous benefits for the short term and the long term.
The passive income factor.
Cash dividends typically pay out once per quarter, with some paying out once annually. What a nice way to make some additional income without having to do a thing! Some investors strive to live entirely off of their cash dividends.
How can you pass up passive income?
You tend to get paid in consistent or growing amounts.
Because investors look for stable dividend stocks, a board of directors will likely always vote to keep dividend payouts consistent or growing from one year to the next.
The main reason is that if a company lowers the dividend, the stock value will drop, and this is bad from a perception standpoint among other things. So in a difficult year, a company will still likely not lower the dividend but keep it the same. Obviously, it’s best to have stocks whose dividends are growing year over year.
Companies issuing dividend stocks are reinvesting profits into the growth of the company.
This is good for you! Because some of the profit or surplus always gets reinvested into the growth of the company, a dividend stock is wise. The company is always going to be focused on improvement and has the cash flow to do so.
You don’t have to think about it.
Where many stocks require some management and thought, dividend stocks tend to require very little maintenance over time. This allows you to focus on the stocks in your portfolio that are higher maintenance (or look for other dividend stocks to invest in!).
Kick back and relax with a dividend stock—they tend to be pretty low maintenance
Dividends that are reinvested provide a large percentage of historical equity returns.
Not only do you see a regular cash return with dividend stocks, but if investors continue to reinvest at least some of the cash back into the organization, long-term returns are more likely. They really are typically the result of reinvested dividends.
So when and how do you decide on a dividend stock to invest in? Consider these two tips in particular before investing in a dividend stock:
When. Definitely do not buy between the ex-dividend date and the payment date because you’ll wind up paying taxes for the other investors. Learn more.
How. In choosing a dividend stock, you want to look for dividends that have a payout ratio of 50% or less. The rest should be reinvested into the business for the purpose of growth. Investorplace.com also recommends that the dividend “should yield between 3% and 6% and the company should have generated positive earnings for the past few years with little or no corporate debt.”
Have a favorite dividend stock to tell us about? Share it here!
Cara Aley is a freelance who writes about everything from matters of blogging strategy to those of online reputation protection. She is currently VP of Operations for Two Degrees, a one-for-one food bar company.
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Category: Money Basics