Stock dividends are a vehicle for companies to distribute portions of a company’s profits to shareholders. The board of directors determines the number of dividends to be distributed. Most dividends are paid quarterly, but others are paid every month and others at less frequent intervals. Some benefits come with this type of investment, and the most important ones are highlighted below.
It’s a Reliable Source of Income
Stock dividends are a stable source of passive income. Most stocks yield dividends quarterly, but some high yielding stocks provide a monthly dividend payout. The cash distributed by stocks dividends is in the form of tangible, money in your pocket cash, as opposed to other saving instruments whose profit is only on paper. Profit earned from dividends is known as equity in trading. When investing in a company, it’s advisable to look for companies that not only grow but sustain their stock value.
Offered By Defense Companies
Most companies that provide dividends are in the defensive sectors. These sectors are usually not affected by uptrends or downtrends in an economy. Thus, they have stable and reliable earnings both in favorable and unfavorable times and are hence consistent and dependable dividend disbursements. They can even pay more than government and other types of bonds, making them an excellent option to add to your investment portfolio. Some defensive companies include those in the food and beverage industry, healthcare, utilities like water and electricity, and real estate.
Strong Companies Provide Such Stocks
Most companies that offer stock dividends tend to be good performers and thus possess substantial amounts of money. This makes stock dividends a sound investment plan.
Fledgling or startup companies are usually not in a strong position to pay dividends since all profits are reinvested in the company to drive growth. Companies generally vote to issue dividends when they have achieved a sustainable level of growth. Also, companies that attain a level comfortable for paying dividends will be more responsible with decisions and risks because they are now accountable to shareholders.
Mitigate the Impact of Inflation
Even experienced investors know how inflation can slice off substantial amounts out of dividend earnings. Consider a scenario where an investor earns a 12% profit, only for inflation to reduce to 9%.
Owning stocks are a reliable way to cushion yourself against the effects of inflation. This is because, in a period of inflation, firms will also raise their product prices, which will also lead to increased earnings and naturally, stock prices.
Hence, some of the best company options to invest in are those that would charge more for their goods and services during times of inflation. These may include companies that trade in gas, cereals, oils, and metals. The prices of such commodities are likely to increase during inflationary times, unlike products like electronics which are dependent on manufacturer and supply agreements.
Low Risk
Dividend-paying stocks are more resilient to risks and volatility prices. In bear market periods, when stock prices are flat or falling, companies continue paying out dividends. These payouts help investors to cushion their portfolio against drops in prices and some cases may even turn a profit.
Thus, buying stocks in dividend-paying companies is an excellent way to cut overall investment risk and enhance long-term profits.
Profit in Two Ways
Dividend stocks give you a return on investment when stock prices appreciate, and when the company distributes dividends – a major benefit not associated with other types of stocks.
These types of stocks provide investors with two ways to win: through the rise in price value and when the company issues payouts, offering part of their profits. Besides, most companies have the option to reinvest your dividends and purchase more shares. This way, investors can build their stock portfolio in the company over time, leading to higher future earnings.
Many such companies offer this option commission-free, and some even offer discounts off the stock price.
Are you looking for a new frontier for investment or seeking to diversify your portfolio? Consider investing in stock dividends. Not only do they help you combat inflation, they are a low-risk venture, guarantee you income, and you can plow them back into reinvestment to earn even more in the future.
