Discussing Why Dividend Investing Is A Worthwhile Strategy
Let’s continue our dividend series on frequently asked questions (FAQs). Today’s question is: are dividend stocks worth it?
For regular readers, it should be no surprise that I’m here to suggest that dividend investing is a good idea. And operating as a do-it-yourself dividend investor for more than 40 years has me convinced of it.
So, let’s dig in…
Why Are Dividend Stocks Worth It?
Dividend-paying stocks are worth it because of their reliable passive income. Also, the potential for outstanding total investment returns by improving your portfolio’s growth potential. As a result, dividend investing has tremendous long-term wealth-building capabilities.
Next, let’s dig deeper into the reasons supporting my answer.
7 Reasons Why Investing In Dividend Stocks Is Worth It
Here are my top 7 reasons dividend investing is worth it for me…
- Dividends are a superb form of passive income
- Higher dividends translate to rising stock prices
- Stock market volatility has little influence on dividends
- Reinvested dividends compound investment returns
- Dividends receive favorable tax treatment
- Rising dividends hedge against inflation
- Dividends can make you rich
Next, I will detail each of these 7 reasons.
And before you go. Be sure to check out our growing archives of dividend articles.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Dividend investing is worth it because…
1. Dividends Are A Superb Form Of Passive Income
First, a well-constructed dividend portfolio generates a passive income stream.
Whether your goal is to:
- Reinvest the dividends
- Retire on dividends
- Live off dividends
- Supplement your income using dividends
In any of these cases, dividends are a reliable source for making money.
Once received, dividends are yours to keep because your dividends can never be taken away.
On the other hand, to receive the same benefits from increasing stock prices. An investor must sell his or her shares.
Are dividends worth it? You bet they are. Here’s reason number 2…
2. Higher Dividends Translate To Rising Stock Prices
The type of dividends I’m talking about today are paid by what is known as a dividend growth stock. Not necessarily a high dividend yield stock.
Simply put, dividend growth stocks increase their dividend rate per share regularly. Most often, once per year.
And they do so year after year after year. Putting consecutive annual dividend increases together that sometimes span decades.
Furthermore, the stock price will rise as a company increases its dividend per share. Creating high long-term total returns from dividends and capital gains.
How Higher Dividends Equal A Higher Stock Price
You may be asking how dividends affect a stock’s price. Allow me to explain…
First, dividends are paid from a company’s financial resources. Those financial resources are created from profits. Those profits generate cash.
Second, for a company to continually increase its dividend rate year after year. It must generate higher profits year after year. Otherwise, the company would have an unsustainable dividend payout ratio.
Third, higher profits cause a company’s stock price to rise over the long term.
Next, you may be wondering how to find these types of stocks. If yes, this is how I go about it…
I find and monitor my dividend stocks using the Simply Investing Report & Analysis Platform.
Simply Investing provides an interactive database full of the latest dividend data. On all of your favorite dividend stocks. Plus you get Simply Investing’s top stock picks.
Thus, Simply Investing evaluates dividend stocks for you. So, you know the best stocks. And when the time is right to buy them.
Let me give an example of the types of stocks Simply Investing recommends…
Why Dividend-Paying Stocks Are Good: An Example
Let’s say a company can increase its profit by 10% annually. Each year this provides a pool of financial resources that is 10% larger.
From those financial resources, a company’s management may increase the dividend rate per share by 10%.
Thus, you the investor earn 10% more in dividends this year versus last, with no effort on your part.
In addition, stock market investors take notice. They see a company generating 10% more in profit each year and bid the stock price up by a similar amount creating capital gains.
Why?
Because the company is more valuable.
Of course, it is never this simple or clear-cut since many other factors can come into play.
However, one thing is clear. You can build your wealth by investing in this company’s dividend growth stock.
Is dividend investing worth it? I say it is. And next is my third reason for thinking so.
But first, save this image to your favorite Pinterest board so you can return to it later.
3. Stock Market Volatility Has Little Influence On Dividends
First of all, the stock market and individual stock prices are volatile.
Furthermore, stocks go down. Sometimes by a lot in a short period.
For example, stocks may fall by 5%, 10%, 15%, or more during any day, week, month, or year.
Don’t let recent years’ stock market gains fool you. Because stock market corrections and bear markets happen.
On the other hand, dividends paid by high-quality dividend growth stocks are stable. Thus, your dividend income will rarely go down.
And more often than not dividend income will rise year in and year out. Here’s why I think so…
An Example Of Why Dividend Investing Is Worth It
Take for example a dividend stock like Johnson & Johnson. Over the long run, the stock price rises along with profits. We just discussed how that works.
But during any year, JNJ’s stock can fall. For reasons unrelated to the company. Or its financial performance.
On the other hand, JNJ’s dividend keeps rising. Since company management has increased the dividend rate per share annually, dating back to 1963.
So, in the case of JNJ. The dividend rate per share increases each year. On the other hand, the stock price has fallen in some of those years. Frequently by quite a bit.
Still wondering why dividend stocks are good. Well, I have a fourth reason for you…
4. Reinvested Dividends Compound Investment Returns
This point is for any investor who doesn’t need to spend cash dividends when receiving them. For these lucky folks, reinvesting dividends is a smart option.
Investors can automatically reinvest dividends immediately back into the stock that pays them. Or let the dividends accumulate in cash. Then, put that cash pile into dividend stock or stocks on a lump-sum basis.
In this way, the dividend investor earns more money on the dividends they have received and reinvested.
Dividends paid on reinvested dividends are referred to as dividend compounding.
Next up, reason number 5. To further support my answer to the question, are dividend stocks worth it? Here goes…
5. Dividends Receive Favorable Tax Treatment
Tax rates on other forms of income can be quite high.
Tax laws are always changing. But if you make a lot of money, you can pay 40% or more of any additional earned income to the Federal Government in taxes.
On the other hand, dividends are taxed at a lower rate. They receive what is known as preferential tax treatment.
Based on the tax laws at the time this was written. And depending on your total income. The dividend tax rate can be as low as zero. While higher earners will pay more. But normally no more than 20% of dividend income.
Better yet, hold your stocks that pay dividends in an Individual Retirement Account (IRA). Then depending on the exact type of IRA. You may never have to pay taxes on your dividends.
One final suggestion. Since everyone’s tax situation is unique…
It’s best to consult with your tax advisor to see just how much tax you can save by investing in dividend stocks. Versus other forms of income.
Moving right along. With our answers to the question are stock dividends worth it?
Here is reason number 6…
6. Rising Dividends Hedge Against Inflation
Inflation is a fact of life. Because over time prices go up. Sometimes by a lot. And your cost of living goes up with those prices.
By earning a passive earnings stream from dividends paid by dividend growth stocks. Dividend income rises every year as a result of dividend increases.
So, those dividend increases provide a hedge against inflation.
Thus, if you rely on income from dividends for living expenses. Now or in the future. And those expenses rise due to inflation.
Rest assured your dividends will rise too. Often by more than inflation. Providing extra income to cover higher costs. With money to spare.
Is dividend investing worth it? Well, if you are not convinced as of yet. Here is our 7th and final reason.
7. Dividends Can Make You Rich
Yes. Dividends from dividend growth stocks as part of a carefully crafted dividend investing strategy can build wealth.
Even more, “building wealth one dividend at a time” is what I like to say.
So, in case you are wondering if dividends can make you rich. I have this answer…
Yes, they can! And I have just one of many possible examples for you…
My favorite story is about Grace Groner. A long-time secretary who worked at Abbott Laboratories in north suburban Chicago.
As a young lady, Grace purchased 3 shares of Abbott stock totaling $180. She kept that stock for the rest of her life. And reinvested the dividends. Thus benefiting from the compounding effect we discussed earlier.
Eventually, her small initial investment grew to more than $7 million by her death.
How can you debate the value of dividend stocks? I can’t after hearing a story like that.
And I know this for sure. If Grace can do it. So can you and I!
Okay. Allow me to wrap up with a few parting comments…
Are Dividend Stocks Worth It?
Dividend stocks are worth it for their wealth-building capabilities. Provided by a growing stream of passive dividends plus potential for share price appreciation.
Furthermore, investors accelerate their progress with tax advantages. In addition to the compounding of dividends paid on dividends reinvested.
Here are the 7 reasons for anyone who cares to ask: are dividend stocks worth it?
- Dividends are a superb form of passive income
- Higher dividends translate to rising stock prices
- Stock market volatility has little influence on dividends
- Reinvested dividends compound investment returns
- Dividends receive favorable tax treatment
- Rising dividends hedge against inflation
- Dividends can make you rich
More Good Ideas About Dividend Investing
Don’t forget to check out our archives full of dividend investing articles before you go. You will surely find something to level up your dividend investing game.
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.