Dividends are the percentage of earnings that a company distributes to stockholders. Generally, companies pay out a dividend every quarter, but some companies might do it on a monthly or an annual basis. The dividend is mostly paid in cash, but, in some instances, it might also be given out in the form of additional company shares. The higher a company’s dividend yield and payout ratio are, the more dividends you can expect to earn on that company’s stock.
Dividend stocks are lucrative for a number of reasons and, in this article, we will discuss a few of those reasons.
Reasons to Invest in Dividend Stocks with Trading-Club:
Passive Income:
Dividends are a great source of passive income. This passive income is similar to interest payments that you might have received in exchange for buying a company’s bonds.
Since dividend income requires no further action on your part except the initial stock purchase, receiving dividends is one of the most passive ways to increase your wealth.
More Resistant to Inflation:
Stocks that pay dividends do better in times of economic downturns, compared to non-dividend-paying stocks. This is because dividend stocks allow investors to profit in two ways: through the dividends themselves, and through an increase in stock price.
For instance, let us say that the share price of company XYZ went up by 6% during a given year. However, during the same year, the inflation rate was 7%. This means that, despite the increase in share price, an investor in XYZ actually lost money when the value of his stock was adjusted for inflation.
But, what if company XYZ also has a 4% dividend yield? In this case, the total earnings would be (6% + 4%) = 10%, which actually gives a gain of 3% when adjusted for inflation (10% – 7%). This means that the dividends helped increase the purchasing power of the employee – something that would not have been possible if the company did not pay any dividends (or had a dividend yield of less than 1%).
Also, the growth in a company’s dividend yield is generally faster than the growth in inflation.
Less Volatile:
Building up from the previous point, their resistance to inflation makes dividend stocks more stable and less prone to wild swings in prices.
This means that you do not have to spend the entire day watching charts and graphs and tracking every price movement of your stock. All you need to do is buy the stock, and then wait until the stock price goes up to a point where selling it off is more lucrative than holding it. In the meantime, you can enjoy regular passive income in the form of dividends.
Reinvestment:
When you earn a dividend income, you can either save it for a rainy day, use it for your personal expenses, or reinvest it into the stock market.
When you use your dividend earnings to invest in the same stock that fetched you the dividend, you essentially utilize dividend compounding to increase your periodic investment returns.
Tax Benefits:
The manner in which dividends are dealt-with with regards to tax makes them a very tax-beneficial form of income. For instance, qualified dividend income is subject to considerably lower tax rates than regular forms of income.
For instance, a person in the 35-37% income tax bracket is only required to pay 20% tax on their dividend income. For the 12-35% income tax bracket, dividends are taxed at just 15%. Meanwhile, people in the 10-12% brackets pay absolutely no tax on dividend income.
Final Word:
While dividend investing is safer, that does not mean that this investing form does not require analysis and due diligence. With Trading-Club, not only can you invest in the most attractive dividend-paying stocks, but also use the platform’s educational content to make smarter and more profitable investment decisions.
To learn more about the dividend stocks and educational material offered by the brokerage, or to register for a trading account, please feel free to check out the Trading-Club website.
Disclaimer: This is sponsored marketing content.
