The Pros & Cons Of Dividend Stock Investing

Up to date on June twenty fifth, 2025

This can be a visitor contribution by Ethan Holden, with updates from Bob Ciura.

Investing in dividends permits an investor to benefit from many elements of investing whereas shifting away from reliance on inherently risky inventory market costs.

Dividend investing consists of a technique which emphasizes excessive dividend shares to create earnings.

These dividends are the (sometimes) quarterly funds that corporations supply to their shareholders, partially as an enticement to maintain their shares.

Dividends are paid primarily based on a per share foundation (every share is entitled to a dividend fee). Buying shares earlier than the ex-dividend date is the deadline for receiving the following dividend.

Observe: Some shares have paid rising dividends yearly for many years.

The Dividend Aristocrats are a chief instance. They’re shares within the S&P 500 with 25+ years of consecutive rising dividends.

You may obtain your free checklist of all 69 Dividend Aristocrats by clicking on the hyperlink beneath:

Disclaimer: Positive Dividend will not be affiliated with S&P International in any approach. S&P International owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet is predicated on Positive Dividend’s personal evaluation, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person buyers higher perceive this ETF and the index upon which it’s primarily based. Not one of the info on this article or spreadsheet is official information from S&P International. Seek the advice of S&P International for official info.

Professional #1:  Insulation From Inventory Market Volatility

One of many many benefits of investing primarily based on dividends is the insulation from inventory market volatility. The inventory market can hardly be predicted with any accuracy. Shares fluctuate primarily based on the fickle calls for of buyers and the actions of large hedge funds and different giant corporations.

Well-known investor Warren Buffet believes that the actions of those actions can’t be predicted by anybody. He as soon as argued that no investor may outperform the overall market over a interval of ten years utilizing technical evaluation.

Shares rise and fall on account of individuals attempting to foretell which occasions will tip the inventory market and which occasions will make securities extra worthwhile.

The typical investor doesn’t have the identical expertise and entry to info that many institutional buyers have and is at an obstacle in these guessing video games as effectively.

Additionally, they don’t have the identical ease of liquidity of their inventory purchases. Most brokerages generate income with each inventory commerce.

An investor could must pay just a few {dollars} each time they purchase or promote, reducing into any returns that they hope to obtain from shopping for low and promoting excessive.

Professional #2:  Diverse Fluctuation

Dividends don’t fluctuate in the identical approach. At its coronary heart, dividend investing is predicated on a handful of presumptions which might be baked in each quarter.

An organization’s dividend may be predicted primarily based on quite a lot of elements. Firms which might be younger and in a progress part count on that their quickly rising inventory worth will woo buyers and that they won’t want to supply any enticement to maintain these buyers. Consequently, these dividends can be small.

As well as, weaker corporations of any measurement won’t have the assets to supply a dividend.

As an alternative, an investor can take a look at an organization with protected, dependable money flows and a historical past of paying dividends and conclude that they are going to supply a dependable dividend into the long run.

Professional #3:  Dividends Can Present A Dependable Earnings Stream

A dividend investor can use the reliability of dividends to pursue portfolio progress another way than the normal inventory market. Conventional inventory market features are sometimes a fluctuation that can’t be simply predicted. Positive factors will typically be punctuated by eventual losses.

Within the case of dividends, the magic of compounding is way more vital. Compounding refers back to the approach curiosity will increase, particularly when dividends are reinvested as a part of a DRIP plan.

The compounding impact is most clearly displayed within the rule of 72.The rule of 72 is a heuristic used to seek out the approximate time in years it should take an funding to double given a sure rate of interest.

Traders who use a DRIP can discover the approximate time an funding will double from dividends alone, with out factoring in any progress, by dividing 72 by the present dividend yield.

For instance, a inventory with a 7% yield – like Dividend King Altria (MO) – would double from its reinvested dividend alone roughly each 10.2 years.

Throughout instances of uncertainty and with financial savings accounts that solely yield just a few tenths of 1 % per yr, an method to investing that may double an investor’s cash that rapidly can be significantly fruitful and engaging as an funding alternative.

As well as, blue chip dividend shares can present a dependable earnings stream just like different types of investing akin to actual property or bonds.

Dividends pay a set variety of advantages on a date that may be predicted months prematurely. They’ll present tidy sums of earnings for individuals who could also be enthusiastic about dwelling on funding earnings over an prolonged time frame. These people are not looking for an enormous lump-sum fee or the periodic promoting of inventory.

Fairly, they need to preserve their inventory’s preliminary funding worth whereas additionally bringing in a supply of earnings that may both increase or exchange their employment earnings. This type of funding fee may even be tailored to be extra common.

One method to investing in dividends is named a “verify a month” technique. This technique is tailored for individuals who desire a common earnings from their investments and don’t need to benefit from DRIP shares.

The “verify a month” refers to how inventory purchases are structured. Firms declare and pay dividends at completely different instances all through every of the 4 quarters throughout a yr.

If correctly arrange, a fund may be structured the place the investor receives a distinct set of dividend checks every month, that means a fixed stream of earnings.

Individually, the webinar replay beneath covers learn how to generate rising passive earnings from dividend investing intimately.

Preserve studying this text to see 3 downsides to dividend investing…

Con #1: Much less Potential For Large Positive factors

One draw back to investing in shares for the dividend is an eventual cap on returns. The dividend inventory could pay out a large price of return, however even the very best yielding shares with any kind of stability don’t pay out greater than ~10% yearly in at present’s low rate of interest surroundings, besides in uncommon circumstances.

A high-growth inventory technique may result in large losses, however the ceiling on features is way increased. As an example, a person who was selecting shares and acquired Apple within the Eighties at a big degree can be extremely rich by now.

Shopping for quite a lot of high-dividend shares won’t result in progress at the same degree. It is usually extremely straightforward for a dividend to go down over time as an organization’s progress mannequin modifications.

Even when an organization has the very best dividends manageable, they nonetheless won’t have the sort of upper-limit complete return potential that almost all progress investing approaches can have.

Con #2: Disconnect Between Dividends & Enterprise Development

One other potential draw back of investing primarily for dividends is the possibility for a disconnect between the enterprise progress of an organization and the quantity of dividends the corporate pays.

Frequent shares should not required to pay dividends. An organization can minimize its dividend at any time. Sometimes, dividend cuts happen when an organization is struggling and can’t pay its dividend with its money flows.

However that’s not all the time the case…

Generally an organization will cut back its dividend as a result of it modifications its capital allocation coverage. An organization could imagine it has higher makes use of of money than to pay a dividend to shareholders. As an alternative, the corporate could make investments extra within the progress of the enterprise, fund an acquisition, pay down debt, or repurchase shares.

In all the above examples, the corporate may very effectively be seeing underlying enterprise progress and nonetheless resolve to cut back its dividend. A con of dividend investing is that dividends from frequent shares should not legally required, and subsequently may be discontinued at administration’s whim.

Con #3: Excessive Yield Dividend Traps

Exceptionally excessive yielding dividend securities could look interesting… However they typically carry outsized dangers of a dividend discount. Extremely-high yield securities with a excessive danger of lowering their dividend funds are referred to as dividend traps.

An investor should do his homework in an effort to determine the true nature of an organization’s inventory yield. Since yield is a fraction depending on each dividend and worth, a dividend could seem extremely excessive regardless that it’s about to be minimize the following time an investor is eligible for a dividend fee.

For an excessive instance, say an organization’s dividend is $1 and the share worth is $50. The preliminary yield can be 2%, not significantly engaging for a dividend-based technique. But when the inventory worth dropped to $10, the yield on the inventory would then be 10%, prime territory for a yield hungry investor.

Nevertheless, it’s clear that the corporate didn’t intend to pay a dividend that was 5 instances the yield it had initially believed it might be.

Subsequently, if there have been no compelling purpose for the share worth to extend nearer to $50, the corporate would in all probability drop the dividend considerably for the following ex-dividend date, making the funding not almost as profitable as it might in any other case be.

Investing in dividends shouldn’t be an method buyers take with out first doing their due diligence. This method requires a substantial period of time and analysis – particularly when investing in particular person shares.

Figuring out concerning the positives and negatives of dividend investing is an efficient first step to determining if this method to investing is best for you.

Additional Studying

In case you are enthusiastic about discovering high-quality dividend progress shares appropriate for long-term funding, the next Positive Dividend databases can be helpful:

The foremost home inventory market indices are one other stable useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month:

The 8 Guidelines Of Dividend Investing