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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Well ignoring stock price appreciation, the difference between dividend stocks versus non-dividend stocks is that dividend.
Wouldn’t you rather be given a small amount of money on a regular basis rather than nothing?
If we don’t ignore stock price appreciation, dividend stocks should behave nearly identically IF those dividends are reinvested.
The main difference is that dividend stocks have their growth stunted by the value of their dividends (which cancels out when reinvested).
You don’t lose what you paid for the stock automatically – you own the stock and can still sell at any time. Hopefully for more than what you bought it for. You *also* get dividends along the way while holding it. You can take that small amount of $ or reinvest it to then have more shares (bigger dividends/ larger sum when sold eventually)
Well ignoring stock price appreciation, the difference between dividend stocks versus non-dividend stocks is that dividend.
Wouldn’t you rather be given a small amount of money on a regular basis rather than nothing?
If we don’t ignore stock price appreciation, dividend stocks should behave nearly identically IF those dividends are reinvested.
The main difference is that dividend stocks have their growth stunted by the value of their dividends (which cancels out when reinvested).
“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.
“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.
You get dividends, but you also have the stock. It’s not like you lose the ability to sell the stock by taking dividends; the dividends are icing on the cake.
The ideal is that you’re collecting dividends from the stock while the stock is also gaining value, so you’re making money in two ways.
Well ignoring stock price appreciation, the difference between dividend stocks versus non-dividend stocks is that dividend.
Wouldn’t you rather be given a small amount of money on a regular basis rather than nothing?
If we don’t ignore stock price appreciation, dividend stocks should behave nearly identically IF those dividends are reinvested.
The main difference is that dividend stocks have their growth stunted by the value of their dividends (which cancels out when reinvested).
You get dividends, but you also have the stock. It’s not like you lose the ability to sell the stock by taking dividends; the dividends are icing on the cake.
The ideal is that you’re collecting dividends from the stock while the stock is also gaining value, so you’re making money in two ways.
You don’t lose what you paid for the stock automatically – you own the stock and can still sell at any time. Hopefully for more than what you bought it for. You *also* get dividends along the way while holding it. You can take that small amount of $ or reinvest it to then have more shares (bigger dividends/ larger sum when sold eventually)
You don’t lose what you paid for the stock automatically – you own the stock and can still sell at any time. Hopefully for more than what you bought it for. You *also* get dividends along the way while holding it. You can take that small amount of $ or reinvest it to then have more shares (bigger dividends/ larger sum when sold eventually)
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