When I first learned about the existence of dividends, I was floored. They have the potential for capital appreciation and regular income, and I wanted in on it.
My first experience was through my retirement account. I noticed that, even after the stock market crash in 2008, my accounts were holding up pretty well. Upon closer examination, I saw that it was due in part to the fact that I was earning dividends on one of the funds in my portfolio.
Dividend stocks are a great way to build wealth for the future while earning income now. Here are 10 great reasons to buy dividend stocks.
1. Dividend Aristocrats Offer Almost Guaranteed Increased Payouts.
When you choose a dividend aristocrat, you are almost guaranteed a payout increase each year.
The term 'dividend aristocrats' is used to describe Standard & Poor's (S&P) 500 Index companies that have consistently improved their dividend rates every year for at least 25 consecutive years. Some dividend aristocrats have increased the payout each year for 40 years or more.
While there is always the chance that a dividend aristocrat will decide not to increase payouts, or get rid of the dividend, chances are you will see an increase each year. When I first dabbled in dividend stocks outside my retirement account, I chose dividend aristocrats. (I'm too boring to try something other than a dividend aristocrat.)
2. There's A Potential For Higher Total Returns Over Time.
With a dividend stock, the long-term returns (or even short-term returns) are about more than just the change in stock price -- there is also the dividend yield. This means you can enjoy strong returns with the right stocks.
3. Many Dividend Stocks Are More Stable.
In many cases, a company can't pay a dividend unless it has profits left over to share. While this isn't the case with all companies (watch out for particularly high dividend yields), if you choose a company that pays a fairly stable dividend over time, there is a good chance it is a stable company, likely to perform solidly over time.
I discovered this in my retirement portfolio. Even while the ravages of a stock crash prevailed, the fundamentally sound dividend fund saw fewer losses -- and a faster recovery later on.
4. You Receive Payouts -- Even During A Down Market.
Those dividend aristocrats not only kept paying out, they continued increasing their payouts (even if only by a small amount) throughout the stock market downturn. If the company remains solvent, you will keep receiving income -- even though the stock price might be heading down. My dividend investments have yet to cut their payouts, even in tough times, and that will offer me peace of mind later on.
5. Dividend Stocks Are Likely To Recover From Downtrends.
In a stock market downtrend, nearly every stock loses value at some point. However, a solid dividend stock -- one that continues to pay out -- is more likely to recover at the end of it. Many dividend stocks are fundamentally sound, and that means a better chance of weathering stock market storms for long-term success.
6. Reinvested Dividends Can Build Your Wealth Faster.
If you have some years until you will need the dividend income, you can use reinvested dividends to help boost your wealth.
Using the money from dividend payouts to buy more shares is akin to getting free shares. Most of my dividend investments, including those in my retirement account, are in dividend reinvestment plans (DRIP). A DRIP allows you to receive shares instead of cash dividend payments. Use DRIPs to automatically reinvest your dividends and watch your portfolio grow at a faster rate. But you need to pay taxes on reinvested dividends.
7. Qualified Dividends Are Taxed At A Better Rate.
For now, qualified dividends are taxed at a lower rate than your marginal rate. If you have dividend earnings, they are taxed at the long-term capital gains rate.
However, it's important to note that this is temporary. Unless Congress makes the tax-favored status permanent, dividends could revert to 'regular' income, taxed at your marginal rate.
8. You Can Keep Them In Tax-Advantaged Accounts.
Dividend stocks can be kept in tax-advantaged accounts. You can keep them in your 401(k), 403(b), IRA or even your health savings account (HAS). However, be careful about how you go about keeping dividend stocks in these accounts.
If you keep your dividend stocks in a traditional account, the dividend earnings will lose their tax-favored status; you'll pay income tax at your marginal rate upon withdrawal. If you keep them in a Roth account (like I do), or if you only use the money in your HSA for medical expenses, then you can avoid taxes on your dividend earnings altogether.
9. Build A Source Of Stable Income.
If you take the time to build a dividend portfolio (usually seven to 10 years), you can create a source of relatively stable income. As long as you choose your dividend stocks wisely, it's possible to create a portfolio that will result in regular payouts that can be used as part of your retirement income strategy.
10. You Can Invest In Dividend Funds.
You can find dividend stock funds that offer you the chance at instant diversity, while paying you a dividend. You can invest in a number of dividend mutual funds and ETFs, and even with a limited budget, you can diversify instantly with the help of a dividend fund. Many funds also come with DRIPs.
The Investing Answer: Dividend stocks provide you with the chance to boost your wealth and create a fairly reliable income stream. Consider using them as part of your investing strategy.