You may be new to investing in stocks or maybe you have bought shares in companies for years, but you may wonder what is dividend investing and whether it is right for you. Dividends are the amount a company pays back to its shareholders after all other expenses are taken care of. The company fixes this amount as a percentage of a total and can raise or lower the dividend at its discretion. The purpose of the dividend is to reward current investors and to incentivize further investment.
Dividends as Income
Many people see dividends as a great form of passive investing while others see them as an effective strategy for maximizing returns in a short amount of time. Dividends are attractive to people investing for retirement because they have the notion that they can pick the fruits off the tree, so to speak, and live off of it for years as a form of passive income. This can be a viable option if one considers a few caveats.
First of all, you need a large amount of stock in a company to be able to live off of the dividends. A moderate dividend is usually between 2% to 3%, and a high dividend is closer to 5%. Depending on your expenses, you would need a large holding to live off of the dividend. In addition, if you cash in on the dividend, you will need to pay taxes at a high rate.
Another consideration is that companies may raise or lower their dividends depending on the health of their business or if they want to make a merger. A company doesn’t have to be failing, but it may simply want to make an acquisition and lower the dividend to raise the funds. If the dividend is your bread and butter, you could be in a precarious position if the company decides to cut the yield. If you want to live off of dividends, look for an additional form of investments on sites like WealthStake.com to provide a cushion of safety.
Dividends to Maximize Growth
Many people prefer to use dividend stocks as a way of maximizing growth rather than relying on the yields on an ongoing basis. You can avoid paying high taxes regularly by reinvesting the dividends and to purchase more shares with it. If the company is thriving, you can dramatically compound your return and make a successful investment in a relatively short time. It is important to take profits now and again, however, in case the stock should fall, but increasing the investment with dividends can expand the return.
Is It Safe?
When investing in dividend stocks, your first question should be whether or not the dividend is safe. Look at the company’s history of paying out the dividend. If the company prides itself in the consistency of its dividend and has a track record over years or even decades of rewarding investors, you can feel safe with that dividend stock. In addition, look out at the dividend payout. If the company pays out a high portion of its own profits in dividend payments, then the yield may be more vulnerable than if the company pays a more moderate rate.