Introduction
In simple words, dividend stocks refer to the shares of well-established and profitable publicly traded companies that regularly distribute a portion of profit to investors (either quarterly, semi annually or annually). Generally matured, stable and well recognized companies distribute their profits to the shareholders that is called dividend.
Key Features Of Dividend Stocks
* Dividends are paid regularly
* It is issued by well established and financially stable companies
* It is less riskier than growth stocks
* Dividends may increase over time
* It is best option for long-term investors
Pros Of Dividend Stocks
Some of the major advantages or benefits of dividend stocks can be highlighted as follows:
1. Predictable Income
One of the major advantages of dividend stocks is steady passive income. It provides regular and predictable income to the investors which is very attractive for income seekers and retirees.
2. Stability And Lower Volatility
As we know that dividend paying companies are well-established companies having strong balance sheet, they are less volatile and more stable than growth stocks.
3. Power Of Compounding
Shareholders can buy more shares by reinvesting the dividend that helps to earn more dividends in the future. So, investors can build massive wealth in the long-term.
4. Protection Against Inflation
Many well recognized and big companies increase their dividends over time that helps to reduce the negative impact of inflation. So, dividend stocks provide hedge against inflation.
5. Potential Tax Advantage
In most countries dividends are considered as tax-efficient income and taxed at lower rates. So, it provides tax advantage to the investors.
6. Suitable For
Dividend stocks are suitable for those investors who seek regular dividend income and stability.
The Cons Of Dividend Stocks
Some of the main drawbacks or disadvantages of dividend stocks can be pointed out as follows:
1. Potential For Slower Growth
When companies pay high dividends to the shareholders they have less money left for reinvest in expansion and growth. So, It may lead to slower growth rate.
2. Possibility Of Dividend Cuts
Even well established companies can reduce or eliminate dividends during tough situation like economic downturns or financial stress , so there is always a possibility of dividend cuts.
3. Opportunity Costs
Growth stocks dominate the bull market and dividend stock underperform. Investors putting money in slow-growing dividend stocks may miss the chance of earning higher returns from other investment options.
Also Read
Pros and cons of blue-chip stocks
4. Unsuitable For
Dividend stock is not suitable for those investors who seek aggressive growth.
Conclusion (Are Dividend Stocks Worth It ?)
Although dividend stocks are good investment option it depends on your financial goals and nature. If you are income-focused, risk-averse and patient then it is suitable for you. Or you can adopt mixed approach (blend of growth stocks and dividend stocks) that helps to mitigate risks.
