Dividend investing is one time-honored strategy to create income. It involves investing in companies that pay out a portion of their profits on a regular basis. There are advantages to this style of investing. Do you know what they are?
You get paid while you wait. One big advantage of investing in dividend-paying stocks is that you get paid two ways. You receive a regular stream of profits paid out to you in cash. Plus, you gain as the stock's price appreciates. This allows you to secure some gain in your investment without exposing said gain to further possible losses.
There is less stock market volatility with dividend stocks. Usually dividends are paid by large, stable companies. These companies tend to trade in a narrower range than stocks of growing companies which can have wild stock market swings. This translates into a smoother investing experience.
You can secure an income stream. Dividends are a good way to create an income stream. In most cases, they pay out on a regular basis. This can be quarterly, semi-annually, or annually. Someone looking for income can benefit from these steady payments.
You get better performance in down markets. The dividend payment helps to offset price depreciation in a down market. This decreases the losses an investor pays. Plus, dividend-paying stocks bounce back with a gain more quickly due to the dividend payouts.
Dividends are a big part of overall return. Historically, the average yearly return on stocks has included a dividend portion. Growth stocks that rely on price appreciation for total return have to work harder to meet the historical average of 9% a year. By investing in dividends, you are already ahead of the game. This is very beneficial in a difficult market when companies are having problems growing their businesses.
Dividends can act as an inflation hedge. Dividends act as a hedge against inflation by providing a secure gain each year. Their stream of profits can offset the rising costs of inflation. This allows the stock price appreciation side to power the portfolio to inflation beating returns. Plus, many companies raise their dividends consistently which assists with keeping pace with inflation.
Reinvesting dividends puts the power of compounding to work for you. This way, the reinvested dividends buy more shares which produce more future dividends and more share price appreciation. It becomes a cycle that powers your portfolio to higher gains.
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