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.
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.
>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*
You get to do both.
When you own a dividend stock it’s just like a normal one. You can resell it whenever you want for whatever price you can get. You aren’t “recouping” anything with the dividend you are just making money.
>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*
You get to do both.
When you own a dividend stock it’s just like a normal one. You can resell it whenever you want for whatever price you can get. You aren’t “recouping” anything with the dividend you are just making money.
>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*
You get to do both.
When you own a dividend stock it’s just like a normal one. You can resell it whenever you want for whatever price you can get. You aren’t “recouping” anything with the dividend you are just making money.
Some people have the goal of their investments to be income generation. These are typically retired people. They prefer bonds and dividend stock which return income they can live on. Older, more mature companies pay dividends because they don’t have a need to build up a pile of cash and they aren’t in a rapid growth phase. Cash is inefficient. It has a low return on investment.
Some people have the goal of their investments to be income generation. These are typically retired people. They prefer bonds and dividend stock which return income they can live on. Older, more mature companies pay dividends because they don’t have a need to build up a pile of cash and they aren’t in a rapid growth phase. Cash is inefficient. It has a low return on investment.
Some people have the goal of their investments to be income generation. These are typically retired people. They prefer bonds and dividend stock which return income they can live on. Older, more mature companies pay dividends because they don’t have a need to build up a pile of cash and they aren’t in a rapid growth phase. Cash is inefficient. It has a low return on investment.
The stocks do also increase in value on top of the dividend payment, but the dividend is more consistent. People with large portfolios can generate enough dividends to have regular income coming in similar to a bond. But $1m in a dividend-paying stock might generate $25k in income. A bond might generate $40k, but the stock also have the benefit of the share price increasing over time, too.
The stocks do also increase in value on top of the dividend payment, but the dividend is more consistent. People with large portfolios can generate enough dividends to have regular income coming in similar to a bond. But $1m in a dividend-paying stock might generate $25k in income. A bond might generate $40k, but the stock also have the benefit of the share price increasing over time, too.
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