Some people believe that the stock market is a zero-sum game. They argue that when an investor buys shares, there’s always a seller on the other end. That’s true… but they fail to factor in dividends. When a company returns capital to investors, it’s no longer a zero-sum game. That’s one reason dividend investing is such a powerful strategy.
Why Invest in Dividend Stocks? 3 Solid Reasons
Dividend investing is one of the best ways to generate income and build wealth over the long term. By picking quality dividend companies (think Dividend Aristocrats), you’ll add a source of regular income to your retirement portfolio while reducing risk.
- Steady Dividend Income
Most dividend companies pay their shareholders quarterly. So investors who build a portfolio of dividend stocks collect a steady stream of income. Spacing out the dividend payment dates can help you meet your expenses throughout the year. The consistency from dividend investing also makes it a popular strategy for retirement.
- Lower Taxes on Qualified Dividends
The qualified dividend tax rate tops out at 20%. That’s much lower than the top individual tax rate of 39.6%. In addition, if you bring in only dividend income, you can collect up to $38,600 and not have to pay any federal income taxes. Taxes eat away at returns, and dividend investing is a great way to pay Uncle Sam less.
- Dividend Diversification
Investing is powerful, but don’t put all of your eggs in one basket. With dividend investing, you can add stocks to your portfolio that operate in different industries from around the globe. You can find Dividend Aristocrats that operate in sectors such as… industrials, healthcare, energy, consumer staples and many other areas. If one industry is struggling, your other dividend investments can help make up any short-term losses.
Compound Your Wealth With Dividend Investing
Compound interest is one of the most powerful forces for growing your wealth – especially if you own dividend growth stocks.
Here’s how: Let’s say you buy $2,000 worth of stock at $50 per share and the yield on the stock is 4%. Additionally, we’ll assume the dividend increases 8% per year and the stock rises in line with the historical market average.
If you reinvest the dividend, you’d automatically buy more shares with your dividend payment. Because you’d have more shares, you’d receive more dividend income, which would buy more shares, which would generate more dividend income…
After 10 years, you would have 59.5 shares of stock – 50% more than your original 40 shares. Your $2,000 investment would now be worth $6,215 – more than triple your initial investment. And your yield would be 12% on your original investment.
If you didn’t reinvest, your $2,000 investment would still be worth a respectable $3,882. But that’s $2,300 less than the amount you’d have if you had reinvested those dividends.
Dividend reinvestment is a great way to supercharge your dividend investing returns. It’s an automated process, and your returns compound the longer you wait. To see how much you can earn, check out our free Dividend Reinvestment Calculator. And below, you’ll find additional investing research and our recent dividend investing articles.