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. (INTC) 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.
it is great for post retirement income too
Great point! Dividends can provide a great source of supplemental income in your retirement years.
I’m actually looking into some dividends stocks right now. My friend asked me to look into buying dividends stocks as well to diversify my portfolio. By the way, do you have any recommendations?
Albert
Albert,
I hesitate to give out stock picks as I have been burnt in the past. In the future, we plan to post articles on a few tools and ratios that you can use to narrow down the list and find only the best companies. That way you can do your own research and feel confident with your selections.
Dividend investing is on my to-do list once we’re completely out of debt, so I’m trying to learn all I can in the meantime. This article was great. I have a couple of questions:
1. What are the cons to dividend investing?
2. Are dividend stocks a good idea for investing inside a retirement account like a 401k or IRA?
Julie,
One of the biggest cons to dividend investing is that your money is still not insured, compared to a CD or high yield savings account. You must still accept the risk that you could lose the investment, although it is less unlikely if you pick the top dividend stocks. I would also say that you can probably earn much higher returns buying growth stocks (i.e. Netflix, Google) but could also lose more as well.
In terms of retirement accounts – yes. The extra income provided by dividends can really help in retirement.
We try to make sure than everything we invest in pays dividends. I mean why not make the extra money?! I also agree with you about people not knowing about passive income- people just don’t think there are options when really there are a ton out there. I think the biggest thing is to be realistic with the time you have to put towards building passive income and then choose the option that fits the best. That way you don’t set yourself up for failure.
It’s also good to look for dividend paying stocks that will hold value or appreciate in value. There’s nothing worse than chasing a yield only to get killed by a bear stock. Great post.
I use to chase yields (when I didn’t know what I was doing) from a couple of Canadian Royalty Trusts. At first, the dividends were amazing but then reality set in. I learned my lesson never to chase a high yield ever again.
We have had both growth stocks and dividend paying stocks. Both have done ok for us. Of course, no passive income along the way with the dividends.
Check out Chevron – we get good dividends from it. If you don’t mind the social aspect, Altria (Marlborough and other tobacco products) also pays pretty good dividends.
Marie – Yes, those have both been strong dividend payers historically. But as you mentioned, there is the social aspect to consider as well.
Good article on dividends and one i can totally agree with as an investor who puts dividends high on the the investment agenda. Albert Einstein said: “The most powerful force in the universe is compound interest” and dividend reinvestment for me is the same.
Tom – Compounding interest is one of the best tools we have as individuals to build personal wealth. I only wish I had realized this 20 years ago!
I’m slowly converting my portfolio over to dividend investments. Dividend stocks are a great way to get that passive income stream going. The tax on dividend is usually lower than your earned income so you get to keep more of that income. I love dividend. :)
Sounds like a good plan converting to a dividend portfolio. I would much rather invest in the so-called “boring” stocks that are consistent as opposed to stressing about owning volatile growth stocks – especially as a get closer to retirement.
You can certainly see your skills within the work you write. The sector hopes for more passionate writers such as you who aren’t afraid to mention how they believe. Always follow your heart.
Dividend investing is a very popular investment strategy. Companies that pay dividends tend to be more mature and stable than non-dividend paying companies. By dividend investing you can also get a steady flow of passive income, which you can choose to spend or reinvest.