Dividend investors know that there are some very real advantages to investing in dividend stocks. Here are 3 advantages to investing in dividend stocks:
1. You Can Earn Passive Income
One of the main reasons that people invest in dividend stocks is to earn passive income. Dividend payments come at regular intervals, and are in addition to what you might have gained in the stock price. Because you receive a regular dividend payment, it can be used as income. All you have to do is buy the stock and sit back.
It is even possible to set up an automatic withdrawal that will help you buy shares in dividend paying investments on a regular basis. As the number of shares you own increases, so will your income. Eventually you can stop investing in the shares and just sit back and enjoy the passive income.
2. Your Money is Usually (But Not Always) Safe
There is no way to guarantee that your money is safe when you invest it; there is always the chance of loss. However, many dividend companies – especially those that have been around for a while – are solid companies with staying power. When a company is paying out a dividend, it often means that it is in a good position to share its profits with shareholders.
When you invest in a dividend paying company, not only are you receiving a regular source of income, but there is also a chance that your principal will be protected. At the very least, there is a good chance that the company in question will ride out economic problems, recovering eventually.
3. You Can Boost Your Capital Gains
Instead of taking regular dividend payments, some companies allow you the chance to reinvest your dividend earnings. So, instead of getting cash now, your earnings are automatically used buy more stock in the company. This can boost your capital gains down the road, since you are essentially receiving free stock. If the price of the stock increases, the fact that you have more shares will benefit you, boosting your gains. These types of dividend investments are known as DRIPs (dividend reinvestment plans).
The main drawback to dividend investing is that the company can reduce its dividends in times of economic trouble, or for other reasons. Even so, for many investors making use of high yield dividend stocks is a wise choice. It allows them the chance to cultivate another income stream – or boost their gains – with an investment in a company that is likely to survive.