Dividend investing have made thousands of people rich with passive income. But is buying dividend stocks really good for you?
As a small investor, you must have come across some big-time investing gurus that peach the massive benefits of buying dividend paying stocks.
They say things like, ‘how these bucket of dividend paying stocks have made them money even when they sleep, or giving them the opportunity to even leave their job’.
If owning a dividend stock give so much advantages, why isn’t everyone buying them?
Is there some secrets that they are trying to keep you in the dark?
In this article we shall dive in and find out the truth of dividend investing.
Here, we shall uncover the pros and cons of dividend investing that these investing gurus are not telling you.
But first, let’s get an rough idea on what is dividend investing.
What is Dividend Investing
Dividend investing, which is also called as ‘income investing’ is a strategy that focus on buying stocks that offers a sizable dividend. These dividends are usually paid quarterly, or half yearly by companies to their shareholders.
Amount of dividend paid is depending on amount of shares you hold, and the amount of dividend per share to be distributed as decided by the company’s management.
For most companies that offers a stable dividend, they will offer you an option to automates your reinvesting of your dividend into the stocks, this is called DRIP.
(DRIP stands for ‘dividend reinvestment plan’ allows you to automatically reinvests all money earned from a dividend into the stock account.)
There are 2 common types of dividends:
- Cash dividend is the most common type of dividend. Cash are paid to each shareholders according to the amount of shares they hold and the amount declared by the company. Cash dividend are generally issued from the retained earnings from the company. The retained earnings of the company decreases when the cash dividend is issued. This can be found at the balance sheet.
- Stock dividend is the next most common type of dividend. Each shareholders are given a specific amount of shares depending on the amount of share they hold. If the company issues less than 25 percent of the current number of outstanding shares, then it will be called a stock dividend. If the company issue more than 25 percent of the current number of outstanding shares, then it will be a stock split. The market value of the company do not change when a stock dividend is issued, or when a stock split occurs.
Companies that offer cash dividend is what most dividend investors are looking to invest.
“Cash is King”
Till now, dividend investing sound like the way to invest, but what are exactly the pros and cons of such a investing strategy.
Let’s find out!
Pros and Cons of Dividend Investing
- Passive Income:
- This the most obvious and probably the main reason why people wants to invest in dividend paying stocks. Just by holding the stocks, you will get paid periodically without you lifting a finger. For a lazy investor like me, this is simply the holy grail of passive income investing.
- Market Resistant:
- Companies which are able to consistently pay dividend over a long period of time are mostly stable blue chip stocks. Generally, these dividend paying stocks are less volatile where their share prices fluctuates less. Which means, you won’t be getting a heart attack that often than investing in a penny stock, which means you get more sleep at night.
- Getting Money Even at Bear Market:
- To be clear, during a bear market, your stock price will probably fall and your portfolio will fall in value. But even during these stressful times, these dividend stock will probably still pay you a dividend. In some cases, the dividend will help offset the drop of the share prices.
- Inflation Protection:
- During inflation, companies usually raise their prices on goods, which in turn sometimes raise the revenue of the company. This will sometime have a positive effect on increasing the payout of dividend to shareholders like you and me.
- Grow Your Portfolio:
- By paying you dividend, you will have cash to reinvest in different stocks, or simply reinvest back into the same stock if the price is right. Some companies have DRIP which allows you to easily grow your portfolio and make your investing as passive as possible.
- Alternative Retirement Plan:
- When you reach your retirement, you will need money to spend. Going back to work at the age of retirement may not be a great way to spend your retirement. Many people investing in dividend stock as a way to plan for their retirement, so that they will have money coming into their bank account, even when they stop working. In fact, we have an article which teaches you, how to earn $50,000 passive income by investing in for retirement.
- 2 Ways to Cash Out:
- Dividend stocks allows you to cash out in 2 different ways; either by selling the stock after the price of the stock raises, or simply by doing nothing and wait for the dividend to be paid to you. It remove the headache of you to time the market on when to sell the stock for the profit. Talking about being a lazy investor.
- Retain Ownership:
- When you brought an amazing stock at a low price, which you really like and have a huge potential of growth, the last thing you want is to sell that stock. Dividend stocks allow you to cash out while retaining your ownership of the stock.
- Unsustainable Dividend:
- High dividend does not always means that it is good. Sometimes the dividend paid is too high that it become unsustainable that cost the company growth.
- Most people buy a dividend stocks because of their fat dividends, and will sell them when the dividend decreases. While most companies pay their dividend through their retain earnings, but some companies pay their dividend by borrowing from banks and financial institutes. Simply because, if they are unable to pay the dividend, their investors to sell the stocks. This move of borrowing to pay their shareholders dividend could be disastrous to the company’s future if they are unable to pay their dues.
- Taxes is a money-eating monster, but every citizen of the country should pay their taxes to help in country building. But getting taxed twice can be much more painful that you know. Cash dividend paid by companies will get double taxed before it enters your pocket.
- Dividend Double Taxation
- Policy Changes:
- As dividend payout is determined by the board of directors of the company. You will basically have no say in how much dividend will you get. The dividend policy are totally up to the board of directors to decide. They can either, maintain, increase, decrease, or even to stop paying out dividend entirely. Changes of these policy can cause the investors to sell their stock, which cause the stock price to fluctuates.
Dividend investing is an amazing strategy which allows you to earn a passive income. But it may not be for everyone.
Each investor have different risk appetite and investing style.
An investing style which does well for someone might not be something that suites you as well.
Dividend investing have many pros and cons which can impact our return on investment.
Pros of Dividend Investing:
- Passive Income
- Market Resistant
- Getting Money Even at Bear Market
- Inflation Protection
- Grow Your Portfolio
- Alternative Retirement Plan
- 2 Ways to Cash Out
- Retain Ownership
Cons of Dividend Investing:
- Unsustainable Dividend
- Policy Changes
Those listed in this article are some of the main advantages and disadvantages of dividend investing.
The only way to know which investing style suits you more, is to read more.
Knowledge is what differentiate a successful investor from a gambler. Successful investors like Warren Buffet is successful, because he have the right knowledge to make the right decision to buy or sell a stock.
Warren Buffett read approx 500 pages a day.
Knowledge on investment can be learn from books or articles like this one. Reading can only make you wiser and smarter, so that you too maybe able to make the right decision in your investment.
Will Durant Said:
“Education is a progressive discovery of our own ignorance.”
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