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?
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Dividends are overrated, but still useful. It isn’t free money.
Companies paying dividends tend to be more solid established (i.e. safer) companies.
When looking at them investment wise, you should consider total returns–dividends plus appreciation since the stock price is reduced by the dividend payout.
They are nice for fixed investment income since they provide a known payout per share, and dividends don’t change all that often– many times they increase slightly (dividend aristocrats), so they can generally be counted upon (you don’t have to sell shares which may be in a dip to generate cash). They do occasionally cut dividends (many oil companies during COVID did so–they paid high dividends and the demand dropped precipitously). Overall the stable dividends makes it easier to determine how much you’ll make while still achieving total gains similar other stocks (much higher than many bonds on average).
Now if you have tax advantaged accounts and an individual account, it makes sense to put dividend stocks in the tax advantaged accounts. In an individual account you pay capital gains on the dividend distribution, but in a 401k/IRA you don’t. Non-dividend paying stocks are better in you individual account so that you don’t have to pay capital gains on the dividend payments–this means the stock will grow tax free (until you sell).
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