TIM THOMAS

How Dividend Investing Plays a Critical Role in Your Portfolio

If you want to build long-term wealth by investing in the stock market, you should consider adding a dividend investing strategy for your investment plan. While most investment plans will build wealth if you stick with it over the long term, a dividend investing strategy has added benefits.

6 Reasons to Consider Dividend Investing

1. Favorable Tax Rates

In contrast to the savings account interest rates, the dividend rate on the S & P 500 currently is 1.95%. So that same $20,000 investment would pay you $390 per year in dividend income. That means you enjoy the favorable dividend tax rate.

2. Higher Returns

Historically, dividend-paying stocks have outperformed the market as a whole. That is simply because, in addition to the growth of the stock itself, you get the added benefit of dividends. When you combine these two, you can achieve higher than average growth.

3. Passive Income

When you invest in dividend-paying stocks, you earn income every time the stock pays you a dividend. In most cases, this means you get paid four times a year.

4. Secure Future

Having multiple sources of income, like dividend-paying stocks, is a great way to provide a cushion in an economic downturn, whether from the usual business cycle or another event outside our control.

5. Lower Volatility

In general, dividend stocks are less volatile than stocks that don’t pay or grow their dividends. There are two reasons for this. 1. Dividend-paying stocks tend to be larger, more mature companies. 2. Investors in stocks that pay dividends tend to be ‘buy and hold’ investors.

6. Long Term Focus

If you own a stock that doesn’t pay a dividend, all you have to consider is the loss of principal. You are still losing principal with a stock that pays a dividend, but you are receiving an income every quarter. When you do this, you benefit when the market turns around, and you experience the gain from the start.

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