Are Dividend Stocks Worth It? (7 reasons they are!)

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?

What a big surprise I have.

Since I’m here to suggest to you that dividend investing is a good idea. And being a do-it-yourself dividend investor for more than 40 years has me convinced.

So, let’s dig in…

Are dividend stocks worth it? Explained
Checking my dividend stocks!

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

Are Dividend Stocks Worth It?

Here are my top 7 reasons why dividends are worth it…

  1. Dividends are a superb form of passive income
  2. Higher dividends translate to rising stock prices
  3. Stock market volatility has little influence on dividends
  4. Reinvested dividends compound investment returns
  5. Dividends receive favorable tax treatment
  6. Rising dividends hedge against inflation
  7. Dividends can make you rich

In brief, dividend stocks are worth it because of the reliable passive income they provide. Also, the potential for outstanding long-term total investment returns. Thus, a dividend investing strategy has tremendous wealth-building capabilities.

Next, let’s discuss each of the 7 reasons why dividend stocks are worth it in more detail.

And before you go. Be sure to check out our growing archives of dividend articles.

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 your money to do with as you please. And your dividends never have to be paid back.

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 span decades.

Furthermore, as a company increases its stock’s dividend rate per share. Over the long term, the stock price will rise along with it. Creating a high total return from dividends and capital gains.

How Higher Dividends Equal A Higher Stock Price

You may be asking what dividends have to do with 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, over the long term, higher profits are what cause a company’s stock price to rise.

Next, you may be wondering how to find these types of stocks. This is what I do…

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.

Allow me to 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% per year. Each year this provides a pool of financial resources that is 10% larger.

From those financial resources, the management of a company may decide to 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 they see the company as more valuable.

To be honest, it is never this simple or clear-cut. Because many other factors can come into play.

But, strip away all the noise, and this is how good companies. Build your wealth by investing in their dividend growth stock.

Is dividend investing worth it? I say it is.

And here’s my third reason for thinking so…

7 reasons why dividends are worth it
Dividend investor

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 given day, week, month, or year.

Don’t let the recent year’s 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 every year dating back to 1963.

So, in the case of JNJ. The dividend rate per share has gone up every year since 1963. While 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

For any investor who doesn’t need their cash dividends when they receive them. Reinvesting dividends is a smart option.

By either automatically reinvesting the dividend immediately back into the stock that paid it.

Or, letting the receipt of several dividends accumulate in your cash account. Put that cash pile into the dividend stock or stocks of your choosing. Doing so on a lump-sum basis.

In this way, the dividend investor earns more dividends. On the dividends, they have received and reinvested.

Dividends paid on reinvested dividends are referred to as dividend compounding.

Next up, reason number 5. Answering the question, why are dividends good? Here goes…

5. Dividends Receive Favorable Tax Treatment

Tax rates on other forms of income can be quite high.

The tax laws are always changing. But if you make enough money, it’s possible to 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 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.

If you have been thinking about opening an IRA. M1 Finance is an excellent place to do so.

One final suggestion. Since everyone’s tax situation is different…

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 questions about 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 dividend income will rise too. Often by more than inflation. Providing extra income to cover higher costs. With money to spare.

Is dividend investing a good idea? 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 sound dividend investing strategy can build your 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 to say…

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 the time of her death.

How can you debate the value of dividend stocks? 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 dividend income plus the potential for share price appreciation.

Furthermore, investors accelerate their progress with tax advantages. In addition to the compounding of dividends paid on dividends reinvested.

To sum it up, here are the 7 reasons for anyone who cares to ask: are dividend stocks worth it?

  1. Dividends are a superb form of passive income
  2. Higher dividends translate to rising stock prices
  3. Stock market volatility has little influence on dividends
  4. Reinvested dividends compound investment returns
  5. Dividends receive favorable tax treatment
  6. Rising dividends hedge against inflation
  7. 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.

conclusions why stock dividends are worth it
Conclusion is written on a whiteboard

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

Addressing The FAQ “Are Dividend Stocks Worth It?”