Dividend paying stocks are a popular investment. There are multiple benefits that you get when you invest in dividend paying stocks. Even though I am a big fan of growth stocks and crypto, dividend stocks provide true passive income which could provide free cash flow for your portfolio, there are many things to consider before investing in dividend paying stocks, the most important thing is to always do your research so that you avoid a value/dividend trap, the companies you invest in must have good profits, revenue growth and a good pay out ratio.
Here are the reasons why I invest in dividend paying stocks:
1. Prices don’t have to increase in order for you to make money. You make money from receiving dividends. You can also compound you wealth by reinvesting in the same company or another company, most brokers like Robinhood and Webull offer this feature. By compounding your dividends you will be surprised how much your net worth will total over the long term. You will be stunt by the amount of your net worth. That is the power of compounding. Your cash flow will eventually be so great through compounding effect to the point you will be financially free. This is very different from non dividend paying stocks which you can earn money only by selling the stock. The best part is, you do not have to move a finger to make this extra money.
2. Historically dividend paying stocks have been good safe investments for tough times since most investors turn to investing in them to avoid having their portfolio hammered. This holds true for growth stocks and cryptocurrency as they are less volatile and have good cash flow, low debt. The Dividend Aristocrats provide one of the best dividend paying stocks list.
3. Earns passive income as the company pays their shareholders dividends from their earnings. Paying dividends indicates that the company is having good income and plenty of free cash flow, this allows them to pay their shareholders, in times of high inflation, many investors will move to this type of investment since it lowers the risk on their portfolios.
4. Consistency of dividend payment is most important. If the is growing it is better. Even though the future cannot be guaranteed, we can make intelligent estimates of the dividends by studying the past. Of importance is dividend payment every year for at least 3-5 years and dividend payout ratio which can be sustained. Also, if the company has a history of raising dividends its shows the company is confident of its future. Declining revenue, high debt and high PE ratios are a bad sign for dividend paying stocks, specially any company paying over 5%.
5. Investors who buy for the long term believe that a dividend will help them reach their target of financial freedom. They also believe their net worth will increase as the stock’s price rises because of its dividend and dividend growth. While there are other factors which will make the stock price increase, dividends is definitely an important factor. The best part is, you do not have to sell your shares to make money from your investments.
6. Long term investors always win as they always in fundamentally strong companies. As fundamentally strong companies are stable companies, they will always be able to pay dividends. Also, investing in strong fundamental companies reduces the risk of losing your capital in the long term.
7. Companies that pay dividend also help you to hedge against inflation as mentioned earlier. Fundamentally strong companies will be able to earn more by raising prices or introducing new products. As they earn more they will be able to raise dividends which will help you to hedge against inflation. Always keep an eye on the company outstanding shares and make sure that you do not invest in companies that offer too many shares each year as this can cause dilution, dividend paying companies also buy back their stock decreasing the supply and allowing for more price appreciation.
The above points give you, the investor, the insights to become a long term investor who will earn passive income through dividend paying stocks. By being a dividend investor you will be to achieve financial freedom as well as increase your net worth.
These are my current holdings in my dividend stock portfolio:
Do you invest in dividend stocks or do you prefer growth stocks? Send us your comments and mention the company name as well. Also note that this idea is not unique to stocks, there is something called crypto staking that can provide you with passive income paid in cryptocurrency, find out more here.