When investing in the stock markets, most investors tend to only look towards gaining from the share value appreciation. However, that’s not the only way to earn income from the stock market. Investing in dividend stocks is also a good way to get a steady and consistent source of income. If you’re wondering what dividend stocks are and why you should consider investing in them, read on to find out more.
What are dividend stocks?
The category of companies in the stock market that possess a consistent track record of distributing their profits as dividends to their shareholders are referred to as dividend stocks. These companies are fundamentally very strong and generally have decades of presence in the industry. Since they’re well-established and have already peaked and matured, these stocks usually have a much lower future growth potential than growth stocks.
Among the category of dividend stocks, there are two primary sub-categories – dividend growth stocks and high dividend stocks. Dividend growth stocks possess a greater potential for future dividend rate increases. On the contrary, high dividend stocks may or may not increase the dividend rates in the future, since they’re already paying out a significantly high rate.
Why should you consider investing in dividend stocks?
Okay, so now that you’re familiar with what dividend stocks are, let’s take a look at some of the compelling reasons why you should consider investing in them.
They’re a major source of passive income
As you’ve already seen before, high dividend stocks periodically and consistently distribute their profits out to their shareholders. This gives you a regular source of income that you can fall back on. Similar to how you get interest payments from your bank deposits, investing in dividend stocks also provides you with guaranteed returns on your investment.
They’re less prone to market volatility
With dividend stocks, you don’t have to spend your time and energy tracking their movements or the movements of the stock market. Since they’re quite stable and fundamentally strong companies, they’re not very prone to volatility or wild swings in their price. A simple ‘buy and hold’ approach is all that’s needed to start investing in dividend stocks.
They’re significantly less riskier
Compared to growth stocks, high dividend stocks tend to not lose much value even in the event of a decline, a crash, or a sell-off. They retain their value during adverse market movements, making them the perfect option for risk averse investors focused on capital preservation. Also, by including these stocks in your portfolio, you can effectively diversify the risk potential.
They help combat inflation
With the rate of inflation on an upward trend, it is important for you to effectively inflation-proof your investments. One way of doing it is by investing in dividend stocks, especially dividend growth stocks. Growing dividend yields can help you counteract the rise in the inflation rate and nullify it.
They allow you to reinvest the dividends
When you receive dividend payouts, you can either use it as a source of income or reinvest it in the same stock. By using the dividend payouts to purchase the shares of the same company once again, you can accelerate the return on your investment, thanks to the concept of dividend compounding. When you consistently reinvest your dividend payouts, you can effectively boost your returns considerably.
They offer you dual benefits
Although dividend stocks do not possess significantly high levels of future growth potential like growth stocks, they do have the potential for value appreciation. Investing in dividend stocks allows you to enjoy the dual benefit of value appreciation as well as consistent and regular income. For instance, you can simply invest in a high dividend stock and reap the dividends for quite a few years and then choose to sell your investment for a handsome profit.
Whether you’re a risk aggressive investor or an investor who prefers to take the safer route, investing in dividend stocks can fetch you great returns in the long-run. That said, it is always a good idea to conduct a thorough and independent research of your own before choosing to park your money in high dividend stocks. This way, you can not only ensure that your investment capital stays intact, but also guarantee steady returns.