Dividend investing is known to be one of the most popular investment strategies. It is also a powerful method to grow your passive income while you are still generating regular income. Dividend-paying stocks are not a requirement of all companies, but individual companies distribute a portion of their net income among their shareholders each year. So, dividends are a way of sharing the profits by a company with its investors. However, the decision regarding the amount and timing of the dividend sharing is upon the company.
Advantages & Disadvantages of Dividend Investing
The primary purpose behind dividend investing is to keep the shareholders motivated for their continuous investment in the company because corporations know that some investors only practice dividend investing for their long-term investment. In short, dividend stock offers too many benefits to investors. But with this, if you are planning to become an investor soon, you must know that there are both advantages and disadvantages of dividend investing:
Invest Once and Profit Twice
It is a fact that once you invest in dividend stocks, there will be other ways that open for you to gain double profits, such as companies’ stock prices increasing over time, so you can earn a return when your share price increases. However, the non-dividend paying stocks are only beneficial if you buy shares at a low price and further sell them at higher ones.
A Good Source of Passive Income
For investors, dividend stocks act as a steady source of income or more like interest from a bank account but with a higher expectation of return on investment. But before you decide to become an investor in any company, analyze whether a company is consistent with dividend-paying or not because it is risky to invest in the company that is inconsistent in paying dividends or decreases shareholder’s profit over time.
Dividend reinvesting means to take the dividend payment and reinvest it to buy more shares in the company. Reinvesting helps the investors to buy more shares and earn even more dividends of the company. It also helps to build the trust of the company on its investors.
Generally, dividend-paying companies are older ones. That’s why these companies are known to be more mature, proven, and profitable businesses. These companies attract investors for the long term who are looking to earn a consistent income. Due to this reason, dividend investing considers being a more stable and less volatile business.
One of the most significant issues that investors have to face in dividend investing is twice the tax. Firstly, the investors have to pay a fee to the company when they receive their profit. Secondly, they have to pay personal tax as an investor on any dividend they earn.
High Dividend Payouts
The dividend payout ratio refers to the distribution of the company’s net earnings to pay shareholders, debts, reinvest in growth, or to serve as a cash reserve. Companies keep high dividends to attract the shareholders but often cut or eliminate their earnings to support future expansions.
Dividend Policy Change
Dividend policy means a company’s policy regarding payment of dividends to its shareholder from net earning and any other potential increase of profit based on future earnings. Changes to this policy sometimes leads to the loss of shareholder’s amount of dividend. However, changes in dividend policy also harm the company’s stock price.