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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“setting aside the possibility of stock price appreciation” is what you’re missing.
Lets say I have $10 and get a stock that provides 1% dividends per year. Next year I have $10.10 with NO stock price appreciation. If we also see the stock match the growth in the market with, say, 6% growth, then the $10.10 would actually be $10.70. The dividend grows as does the principal.
But you’re also correct in that the “Passive income” is minimal to most of us. You only have true “passive income” when you have a large fortune. If you, say, have $10mil invested in the same stock with a 1% dividend, then you’re not too concerned about the growth of the principal and instead would benefit more from having that $100,000 “income” per year while your nest egg sits there and keeps growing with that “stock price appreciation.”
Also, you never have to “recoup” what you paid for the stock, since you can always sell. You don’t lose out on that $10 that I discussed above. even if you keep the $0.10 “income” every year, you still will keep your $10 (assuming no bankruptcy of the invested company.
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