Some publicly traded companies pay profit distributions to shareholders in the form of dividends, which can be paid in cash or company stock. These dividends provide investors with a steady income stream that is not dependent on market fluctuations. The money represents spendable cash that can either be reinvested or used.
If the dividends are reinvested, overall investments will increase at a compounded rate. The individual will own more shares that earn dividends, which will increase the total income stream. At the same time, stock values are known to historically increase, so the shares that are purchased with the dividend money will increase. This adds to the overall investment value, a nice situation for any investor.
Stocks that pay dividends are usually less volatile than those that do not. The fact that the stock has reliable dividend returns presents less risk to an investor. This is especially important when the market is declining because investors will not be able to get needed returns from price appreciation. Investors tend to buy dividend stocks during this time, an action that further stabilizes the stock price and allows it to fall less than the equity market in general.
Dollar cost averaging is promoted by dividend investing because purchasing more shares lowers the average purchase price for the shares as the stock price fluctuates. The average annual rates of return on stocks are about ten percent, half of which is due to dividends. The inclusion of dividends makes up for an otherwise lackluster performance of the general market.
Stocks that pay dividends are recommended during both good and bad market conditions. When the market is weak, dividends offer a return on investment to make up for negative or steady prices. During a strong market, dividends give increased share prices an extra boost. When the dividends are reinvested, individuals will benefit from increasingly greater streams of income and an overall investment that is both larger and much more valuable.
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Dividend investing is the only way I invest, and here's why: dividend stocks create a secure, passive income, and are less risky than non-dividend investing.
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