One of the key factors that unites anyone who considers becoming a dividend-centric investor is the ever growing income stream these investments provide. There is no question that being a disciplined dividend investor will have you reaping the rewards for decades to come. With that being said, let’s examine some of the key benefits of dividend investing.
Passive Income Stream
The number one reason people cite for being a dedicated dividend investor is the passive income stream it provides. Of course, the benefit of a passive income stream is that you didn’t have to actively work for it and it continually flows giving you the choice of spending the income or reinvesting it. In fact, many retirees bank on this passive income stream to supplement their Social Security, pension or other income benefits received. The ultimate goal of most dividend investors is to reinvest dividends until a large enough income stream can be generated to support a certain lifestyle.
Dividends are a very tax efficient form of income. Currently, dividends are taxed at a 15% rate for tax brackets ranging from 25%, 28%, 33% and 35%. Even If you are an individual earning more than $400,000 a year the taxes on dividends are only 20% and well below other income tax rates. Place your dividend investments in non-taxable accounts such as an IRA or ROTH and avoid paying any taxes while your investment grows and pays.
Two Ways To Profit
Of course, when most people buy a stock the mantra of “Buy low, sell high” seems to resonate. All this really means is that you are seeking a capital gain on your stock. When owning a dividend paying stock you have the capacity to profit from a regular dividend distribution along with capital appreciation too. Personally, I like the mantra, “Get paid to wait.”
One of the greatest phenomena that every dividend investor experiences is the power of compounding. See, with each dividend distribution that comes in additional shares of stock are bought. This of course in turn buys additional shares giving you a larger dividend distribution the next time around. This compounding occurs without adding any new capital. In fact, dividend investors can experience double and even triple compounding with their investments. Some companies not only pay dividends, they also raise them every year thereby giving you a double compounding effect. Looking for a triple compounding effect? Buy a stock that pays a dividend, have it raise the dividend and finally add new capital. The triple threat of dividend investing. By doing all three you’ll see your income stream rise very quickly year over year.
Trade Less Frequently
Another indirect benefit of dividend investing is that you inherently trade less frequently and thus save on commission costs. Studies have shown that trading in and out of stocks too frequently incurs the added expense of trading fees and often does not perform any better than buying and holding for the long run. The very nature of investing in high quality dividend payers by default means you have an investment that is solid, reliable and predictable so why would you ever want to sell a position that possesses these qualities?
Dollar Cost Average
Dividend investing also gives you the benefit of dollar cost averaging your purchase price without adding any new money of your own. If you bought a stock that happened to lose value after your purchase date your next dividend distribution will automatically buy new shares at a lower price thus lowering your average cost of the position.
Fees are everywhere. And with banks, airlines and other businesses nickel and diming us to death it’s nice to know that when you reinvest your dividends automatically it is done done fee free. Why not reinvest those incoming dividends and take advantage of this free manner of adding stock to your portfolio.
Why are you a dividend investor? What reasons compelled you to finally take the plunge into this investment style?
In collaboration with Brian @ Debt Discipline