Investing in the stock of a company allows you to benefit if the price goes up. This strategy can work great if you’re speculating that a business will do well and the price does go higher.
However, you probably know that stocks can go up and down in price over time.
Having a way to ensure that you get paid for holding a stock is even better if you also want to generate passive income. Getting this extra income is possible when you utilize dividend investing.
You’ll get paid quarterly for just holding a company’s shares in your account.
What Is a Dividend Stock?
Dividend stocks can go up and down in price. The main factor making them different is the reliable and steady payout they provide each quarter.
When you are looking for an income stream, you’ll want to consider dividend investing. This type of stock has a few terms associated with it, which are essential to know.
- Dividend yield
This number reflects the percentage amount of dividends that the company will pay annually. It’s determined by dividing the stock price by the amount of dividends a company pays each year.
For example, if a company pays four dollars each year in dividends and has a stock price of $100, it’s dividend yield will equal 4 percent. The dividend yield is often used to examine and pick the highest paying dividend stocks.
- Cost basis
The price of a dividend stock when you buy it.
- Ex-dividend date
To be eligible to receive the next dividend payment, you must be invested in a dividend stock before this date.
- Date of record
The company creates a list of shareholders who are eligible to receive the current dividend being paid. The date of record is two trading days after the ex-dividend date.
- Pay date
You’ll receive the dividend on this date, which may be several days after the ex-dividend date.
As long as you hold a dividend stock before the ex-dividend date, you’ll receive a dividend when it’s paid.
Is Dividend Investing a Good Strategy?
This type of investment strategy can be a great way to generate wealth over time. It has a few advantages over stocks that don’t pay a dividend.
The first advantage is the ability to have an income stream that doesn’t require you to sell any shares of your stock. This strategy can be beneficial if you need a little extra money to supplement your income and use the dividend cash payments as a way to pay your bills.
You won’t have to go to the trouble of selling shares to get the money you require.
You can also take the dividends you receive and reinvest them back into the stock. This strategy allows you to grow your investment through price appreciation, which can end up providing you with even higher dividend payments in the future if the price of the stock continues to escalate.
Pros and Cons of Investing in Dividend Stocks
Every investment strategy has its pros and cons. Here are a few of the reasons why dividend stocks can be beneficial to own.
- Provides passive income
Treating dividend payments as passive income means you’ll be able to get paid without performing any work. It’s an excellent method for generating a secondary source of income.
- Acts as a defense when markets are bad
When a correction develops in the stock market, a dividend stock will continue to pay you dividends as long as you have done your due diligence when choosing the highest paying dividend stocks.
- Can be reinvested
You can use the dividend payment you receive to purchase more shares. Doing this can lead to more money through price appreciation in the future.
Here are some disadvantages of investing in stocks that pay dividends.
- May be low growth companies
Growth companies usually don’t pay dividends to shareholders. They take their profits and put them right back into their business to open new facilities or enter new locations.
Price appreciation can be much higher for growth companies than companies that pay dividends.
- Payout risks
It’s a good idea to thoroughly analyze the highest paying dividend stocks.
While these payments can be helpful to receive, they may hinder the growth of a company. Some companies would be better off reinvesting into their growth to stay ahead of the competition.
You’ll need to decide if dividend investing meets your goals and strategies. It can be used alongside other approaches such as investing in high-growth companies or on its own if you want some extra income each quarter.