I’m trying to understand the benefits of dividend stocks. I usually hear they generate “passive income” but from what I can tell, the dividend you receive is a tiny fraction of what you paid for the stock itself, and would take decades to recoup what you paid for the stock. Setting aside the possibility of stock price appreciation, how is receiving a small dividend better than keeping the lump sum you would have paid for the stock to begin with. What am I missing?
In: 5
There’s lots of things that need to be considered when investing in dividend stock – but if it is indeed a solid company then it is essentially a cash cow.
Recouping is a bit of a moot point because you’ve made profit as soon as you receive your first dividend. If that dividend is reinvested then essentially compounding effect comes into play.
You could say you’d make greater gains with growth stocks, but essentially with these stocks they’re reinvesting in order to take on greater risk e.g. diversification or change in marketing strategy. And it’s easy to get survivorship bias when judging them against dividend stocks.
Many would say (stable) dividend companies are good for wealth preservation and stability, whilst growth is riskier but potentially more profitable – and so is good for those with a larger risk appetite (or those who are younger and so have more flexibility to recover from a bad outcome).
Latest Answers