John Schroeder is a personal finance blogger who enjoys writing about passive income, debt-free living, and financial independence. He also enjoys sharing his experiences in raising a family on a single income, while his wife stays home with their three children.
One of the best ways to build personal wealth is through dividend stock investing. Dividends are payments made by public corporations to their shareholders as a way to pass along earnings. Most companies pay these distributions on a quarterly cycle, although there are some organizations that pay monthly or annually. Investors who own shares of stocks that pay dividends are rewarded for taking on the risks as a partial owner in the company.
Not sure if dividend stock investing is for you or you think it is too risky? Consider the following reasons on why this type of investment tool can help build personal wealth while minimizing potential risks.
Higher Return on Investment
Investing in a low interest rate environment can be a frustrating challenge. With 12 month certificate of deposit (CD) rates hovering around 1%, there are few safe investment places to invest ones money. Even a 5 year certificate of deposit is returning less than 3% on average. With interest rates so low, there is not a lot of incentive to tie up money in one of these accounts to earn such a small return.
One alternative to savings accounts and CDs is dividend stock investing. This type of investment can easily provide a return on investment of over 3%, just in dividend income. For example, Intel Corp. ( ) has a current yield of 3.4%, which is much higher than even the best 5 year CD. Of course, there are no guaranteed returns in the stock market, but there are investment strategies that can help one lower their risks.
Dividend stock investing can also provide the potential to earn capital gains, in addition to dividend income. By investing in self sustainable companies that pay dividends, investors have the potential to build long term wealth from dividends and capital gains.
Earning Compounding Interest
In order to build wealth, investors need to take advantage of compounding interest whenever possible. Putting your income earned from an investment back to work making money helps to accelerate personal wealth and puts you one step closer to sustainable personal finance. Similar to other interest bearing accounts, dividend stock investing can leverage the power of compounding interest.
One of the best ways to begin earning compounding interest is to reinvest dividends back into additional shares of stock. Many companies offer what is known as a dividend reinvestment plan or DRIP. These plans automatically reinvest dividend income earned back into more shares of the stock, which will eventually earn additional income. Many companies offer the ability to setup a DRIP directly through the company and most online brokers offer this service as well.
Passive Income Earnings
We know that having multiple income streams has become a crucial part of personal finance these days. Gone are the days of being able to rely on a single employer to provide income for your well-being, not to mention your family. Without several sources of income coming in each month, you are one downsizing away from losing your home and way of life.
The problem is that even though most people realize they need other sources of income, few people have the time to balance their current job with their family. That is where passive income ideas come into play. Passive income is basically a source that earns money that requires very little of ones time to maintain. Earning interest off of a certificate of deposit would be an example of passive income.
Dividend stock investing is considered one of the best tools for building a passive income stream. Building an income portfolio of only the best stocks can become self sustaining and require only routine maintenance making it a perfect passive investment tool.
Final Thoughts on Dividend Stock Investing
There are many reasons why you should do dividend stock investing, especially in a low interest rate environment. Other interest bearing investments (i.e. certificate of deposit) just don’t offer a high enough yield compared to a dividend stock. In addition, dividend stocks offer the opportunity to earn compounding interest by reinvesting any payments back into purchasing additional shares of stock. Finally, owning shares in companies that pay dividends is an ideal way to create a passive income stream. Provided the investor selects only the best companies, earning recurring income from shares only takes periodic maintenance freeing up more of your time.