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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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.
Dividend providing stocks are for companies where more investment in running the business won’t help grow the business at all. Otherwise the company would be better off re-investing profits back to funding growth.
Imagine a company setup just for running a toll road. The stock sale funds the initial building of the road. Dividends are all the fees collected minus the operating expenses. The stock owners still own the road. The company doesn’t plan to build more and more toll roads around the country, just operate the one it has.
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).
Dividend providing stocks are for companies where more investment in running the business won’t help grow the business at all. Otherwise the company would be better off re-investing profits back to funding growth.
Imagine a company setup just for running a toll road. The stock sale funds the initial building of the road. Dividends are all the fees collected minus the operating expenses. The stock owners still own the road. The company doesn’t plan to build more and more toll roads around the country, just operate the one it has.
Dividend providing stocks are for companies where more investment in running the business won’t help grow the business at all. Otherwise the company would be better off re-investing profits back to funding growth.
Imagine a company setup just for running a toll road. The stock sale funds the initial building of the road. Dividends are all the fees collected minus the operating expenses. The stock owners still own the road. The company doesn’t plan to build more and more toll roads around the country, just operate the one it has.
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).
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).
When you buy a dividend stock, you still OWN the stock. You collect the passive income (which, yes, is just a small % of your initial investment). But you still own the stock which you can then sell later on.
If you buy a particular stock for $100 that pays a 5% dividend, you collect that $5 every year, and can sell the stock at any time for the prevailing price. Dividend stocks are typically less volatile, so you can usually expect it to trade somewhere near what you bought it for whenever you sell.
When you buy a dividend stock, you still OWN the stock. You collect the passive income (which, yes, is just a small % of your initial investment). But you still own the stock which you can then sell later on.
If you buy a particular stock for $100 that pays a 5% dividend, you collect that $5 every year, and can sell the stock at any time for the prevailing price. Dividend stocks are typically less volatile, so you can usually expect it to trade somewhere near what you bought it for whenever you sell.
When you buy a dividend stock, you still OWN the stock. You collect the passive income (which, yes, is just a small % of your initial investment). But you still own the stock which you can then sell later on.
If you buy a particular stock for $100 that pays a 5% dividend, you collect that $5 every year, and can sell the stock at any time for the prevailing price. Dividend stocks are typically less volatile, so you can usually expect it to trade somewhere near what you bought it for whenever you sell.
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