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Dividend Investing - Pros and Cons of Dividend Investing

Updated on February 8, 2012

Some of the best passive income that you can receive is from investing in the stock market. The money you receive in the form of dividends is a representation of the company profits that you have chosen to invest in.

Stocks come in many forms, but to break it down simply there are two main types of stocks

a. Preferred stock: Is usually the first stock that the company releases. These usually pay higher dividends than common stock

b. Common Stock: which most people, own dividends as well just not as much but can still bring a nice profit for you to invest.

As a regular investor like me, you want to look for the best individual companies to invest in. You want to find ones that have enough cash on hand to raise dividends over time. As well as make sure the dividends have a decent percentage of yields. You can also purchase shares of mutual funds which are pooled money together from a variety of sources that invest in just dividend companies. The dividends are then split up between the investors in the mutual fund on a per share basis. This is a lot less risky than individual companies since your money is spread out over a number of different companies.

Pros of Dividend Investing:

1. The biggest benefit of dividends is that they pay you money from the profits of their company. These dividends can be used as a source of reinvestment in the company to increase your holdings.

2. Dividends also create much needed cash flow for those on fixed incomes. So, you can use the money earned from dividends to live comfortably as an extra source of income. This is a terrific way to help you plan for retirement.

3. Dollar cost averaging. If, you consistently reinvest the dividend payouts for a particular share of mutual fund or regular company stock. You are going to buy those shares at a lot of different prices as the stock price rises and falls. But, when you take the average of all the shares you have purchased over time you will come out ahead because the average price will always be lower than the stock’s current price.

4. With, the market in constant fluctuation of highs and lows it is hard to sometimes rely on a profit from the stock market. Dividends can have an enormous benefit when they are in your portfolio. When the market is down you are still earning a decent return on your investment because of the dividend income you are invested in.

5. Dividends profit: There are not many ways where you can see profit on a regular basis in the stock market. Most of the time you buy a stock and pray that it goes up. In the case of dividends, you can start seeing the profits from them almost immediately. When you invest in them, many will pay monthly, annually, or quarterly into your account.

Of course with all the benefits of investing in dividends, there are some negatives to it, as well.

Cons of Dividend Investing:

1. Dividend income is taxed as regular income. So, when you make a profit on it has the same tax holding requirements that you would normally have on a regular paycheck. The income tax must be paid on the ones held less than one year and a regular 15% flat tax for those in other tax brackets for stocks held longer than one year.

2. As with everything in the stock market everything changes. Some dividend payouts by companies will continue to go up while others may be put on hold or canceled altogether. These are up to the companies that have those payouts.

3. Dividend investors stock shares can fall and rise with market fluctuations over time. This can devalue each share as well as a result in the loss of the dividend premiums.

4. Dividend stock prices generally go down when the yields or interest rate rise in the market place. If, you invest because of a high yield you may want to pull your money out and look for a different dividend stock to reinvest with.

As with any investment you should do your own due diligence and I will never tell you what you should invest in or not. I simply bring the information about these topics for you weigh your options. If, you are unsure on whether you should invest in dividend stocks talk with a financial advisor to help you come up with a plan to meet your financial goals.

Comments

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  • Kadmiels profile imageAUTHOR

    Kadmiels 

    6 years ago from Florida

    I have a couple of articles for mutual fund discussions

  • Casey Strouse profile image

    Casey Strouse 

    6 years ago from Phoenix, Arizona

    IMO microlending sites are safer, have a quicker ROI, and a higher ROI relative to the risk involved.

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