Benefits Of Dividend Investing

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.

 

Tax Efficient

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. Most tax estimators will attest to that as well. 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.”

 

Compounding

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.

 

No Commission

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?

58 thoughts on “Benefits Of Dividend Investing

    • Hi DD,

      Better later than never. Too often you hear the same sentiment you are echoing from others. “I wish I would have started sooner.” But hey, no time like the present and keep sticking with your plan and in a few short years you’ll start to see that dividend income become meaningful. Thanks for stopping by.

  1. All very fair points which really make me wonder why more people don’t actively invest into dividend stocks. To make you jealous – in Estonia dividends aren’t taxed at all on the investor’s side (corporations pay the taxes before dividend payouts). Just take the money and enjoy!
    Kristi recently posted…Impact of fees on stock purchasesMy Profile

    • Hi Kristi,

      This is what I always say… Why isn’t dividend investing more popular. I guess the hot stocks always grab the headlines and attention of people instead of the slow growth, stable stocks. Think about it… what’s in the news more? FB, TSLA or KO and MMM. Thanks for sharing that great tidbit about dividend in Estonia. Tax free income is always a great benefit. I had a great time in Estonia too by the way. It was part of my travels when I was in Russia, Finland, Estonia and Latvia. Thanks for commenting.

  2. Nice overview of the benefits you’ve got there!
    As many other, I wish I found out about this kind of investing earlier.

    The “get paid to wait” is great. 🙂
    I’m a fan of “Best holding time is forever” as well!

    Best wishes. DfS
    Dividend for Starters recently posted…Recent buy – JulyMy Profile

    • Hi DFS,

      I learned my lesson many years ago when I bought RedHat. I got the stock right before the dot com crash and saw the share price drop from the $40s to low single digits. I kept buying more and averaging down but it took me almost 7 years to make a profit and all that time my money was tied up and I wasn’t get paid to wait. To think of all those years that I could have been earning dividends while the stock recovered. Oh well… Thanks for stopping by.

  3. Nice summary – most of these are why I’m a DG investor!

    By the way, I’d also add on top of the trades less portion – lower fees. I don’t have to pay 1%+ consistently to a financial advisor or a mutual fund.

    Best of luck,

    Warrior

    • Hi TDW,

      Glad you enjoyed the blog post. To your point about fees, most people don’t realize the harmful effects of seemingly small fees on a portfolio over time. True 1%+ doesn’t sound like a lot but over time it can mean the difference of thousands of dollars in your overall portfolio. Buy high quality dividend stocks and trade less, trade less = less fees, reinvest those dividends for free and save even more. Thanks for commenting.

  4. DivHut,
    I started dividend investing because I received a share as a gift. I like being able to reinvest dividends the best. It’s compounding interest at it’s purest. But now some of my holdings have gotten larger in my portfolio so I’m not reinvesting all of them anymore. But I can still take the divs and put them in the next holding. Trading stocks takes too much effort and is riskier without proper hedging and stop losses. Dividends is much more passive which I like.
    -RBD
    Retire Before Dad recently posted…Three New Stocks In My No-Fee PortfolioMy Profile

    • Hi RBD,

      That’s a great story about your start in dividend investing. I often think the best gift for graduation, birth, wedding, etc. is some stock in dividend paying companies. In fact, I gave stock to two buddies of mine who recently got married. Some shares of GE and USB. I told them to forget about the stock and let the dividend just reinvest automatically and revisit the stock in ten years. I’m like you… I don’t like to trade stocks and I basically just buy. It’s been many, many years since I sold any holding of mine. Thanks for stopping by.

    • Hi DD,

      That’s the point of dividend investing. Getting that snowball to simply start rolling and once it does you will have created an income generating machine that can last for generations. Thanks for commenting.

    • Hi DD,

      While it’s great most in the PF community invest in dividend stocks, every now and then I see an AMZN or the like that doesn’t pay a dividend in some portfolios. I also worry that many seek current high yield and chase those lofty 7%+ yields with MLPs or REITs and do not realize that risks involved with simply going after a high yield. There are many great companies that are public that don’t pay a dividend but for my money they aren’t for me. Many are part of prestigious indexes and funds too. Still, I look for a payment.

  5. Hey Keith,

    I agree with all the main points you bring up (although I am investing in ROTHs, so they are not taxed at all). I would also add that with the market being at such highs dividend stocks do not seem to be priced nearly as high as growth stocks also providing better value and more stability when a correction should occur. The taller (high PE) the stock is, the harder the fall, right?
    Kipp recently posted…Earn Money Over 10 Times In a SINGLE TransactionMy Profile

    • Hi Kipp,

      Kudos for having a tax advantaged account for your dividend holdings. It definitely allows compounding to occur at a faster rate when taxes don’t have to be paid yearly. And while it’s true that in general dividend stocks do not have the ridiculous PEs of some of the growth stocks out there when bad times come it hits everyone hard. In 2008/9, dividend stocks also got clobbered. The best bet is to have a mix of stocks and really load up when prices fall hard. Thanks for commenting.

  6. Lots to like about DGI! I stumbled on it after getting laid off and being out of work for a while and getting a taste of FI. It was just so intuitive, replace income with income. For anyone looking to retire I think DGI is a great approach if they want to be more hands on with their investments. Plus you’re investing in the proven companies rather than the next hot tech company.
    JC @ Passive-Income-Pursuit.com recently posted…Recent BuyMy Profile

    • Hi PIP,

      It’s a great feeling replacing one income with another. Especially, if the income is generated passively. Once you develop a certain degree of dividend income you realize that you are not as dependent on that regular job anymore and have the seeds of FI planted. Appreciate your comment.

    • Hi DGJ,

      Exactly as I see it. Plain, simple, easy to understand reasons for investing in dividend stocks. I hope this encourages people to take the plunge to start growing their own income stream. Thanks for stopping by.

  7. DivHut,

    That is a very thorough list of dividend investing benefits. I learned several years ago, that trying to stick with a “withdrawal” strategy during retirement wasn’t going to work for me. Between potential stock market crashes and long term 0% interest rate environments, that is too much for our retirees to worry about. Steady income from a variety of companies is the best way to go.

    MDP
    My Dividend Pipeline recently posted…Stock Purchases Kraft & AflacMy Profile

    • Hi MDP,

      Honestly, for myself the number one reason I am exclusively investing in dividend stocks is for future income. As you mentioned, withdrawal strategies are not as black and white to follow. The key to life is a sustainable income that can support or supplement your retirement without having to touch your principal.

  8. Wait, your name is Keith, not DivHut? Cool, greatest name ever.

    Seriously, nice summary of the benefits. I forwarded this to my wife and daughters. They don’t listen to me, maybe they will listen to you. 😉
    Thanks,
    KeithX

    • Keith Park… 🙂 Glad you enjoyed this post. Sometimes you have to drill these points over and over before someone gets it. I hope your wife and daughters will hop aboard the dividend train too. Often, once people are much older, they realize that they should have invested in some “boring” dividend stock at age 20 instead of some high flier social stock or tech that may fly high but crash and burn. The benefits to dividend investing are numerous. As I mentioned to others, I’m still not sure why it isn’t more popular. Thanks for commenting.

    • Hi DM,

      My sentiments exactly. There are so many proven methods and benefits to dividend investing that I never understood why it isn’t more popular. Of course, TSLA or FB grab the headlines but I’ll take the steady growth and income from my “boring” stocks any day. Thanks for stopping by.

    • Hi LAH,

      The key word you mention is ‘patience.’ Too often we are lured into the hot flavor of the day stocks and get enticed to invest in them instead of good old fashioned “boring” dividend stocks that will do just fine for most over time. It seems that most people don’t want to put in the time. Thanks for commenting.

    • Hi Kalen,

      I like to keep things simple in my life wherever I can. As you mentioned, dividend investing, for me, is less stressful and less of a hassle because I’m not focused on daily or monthly gains trading in and out of stocks. I have the long term horizon measured in decades and don’t sweat the market gyrations. For the most part, I just focus on my monthly buys and that’s about it. Of course, I’m not totally hands free but then again I’m not tied to the market every second either. Thanks for commenting.

  9. Hi DivHut, I’m definitely a big fan of dividend investing, especially here in Australia with it’s imputation tax system, where most dividends come with an extra juicy franking credit! It’s especially rewarding in low tax accounts, where you get paid a bonus by the tax office at the end of the year! But despite this, I also agree with everything you’ve said. Must admit though, I still love having a few growth stocks in my portfolio, which also provides a little extra dose of excitement at times 🙂
    Jason @ Islands of Investing recently posted…Take a Spin in this Stock Investment Simulation with Silex SystemsMy Profile

    • Hi IoI,

      Thanks for stopping by and sharing some of the seemingly awesome tax benefits Australian citizens get regarding dividend income. As for some “exciting” stocks I get my share from my reliable dividend stocks. I’ll take stock splits and spin offs over hair raising highs and lows many growth stocks experience. Everyone and their comfort level, right? Thanks for commenting.

  10. This is a great list. My biggest two reasons for preferring DGI are the passive income stream and the generally greater stability of the large dividend paying companies. It’s working well for me so far!

    • Hi GMS,

      That’s awesome. It seems the number one reason cited for DGI investing is the passive income stream it generates. I know that’s my main reason for investing in this manner and like you I am very happy with the results so far. Thanks for stopping by and commenting.

  11. Great talking points and if one of your readers were on the fence about dividend investing they have now jumped over the fence. All the benefits are so obvious I don’t get how people can’t understand it. I am looking to grow my dividends to 20 grand a year hopefully before retiring.
    EL recently posted…The Recession AftermathMy Profile

    • Hi EL,

      Thanks for the encouraging words. I hope my article could sway those on the fence to finally take the dividend investing plunge. Like you, I am amazed that dividend investing isn’t more popular or mainstream than it is. I can venture to guess why. First, most dividend investors buy and hold for very, very long periods of time. Fewer trades = less commish. Not good for business. Second, the media and brokers like to push headline stocks. What’s hot, what’s in the news. FB, TSLA, TWTR, YELP, etc. How exciting is news from MMM, BMS or ITW (new Scotch tape or fastener on the market). Three awesome dividend aristocrats but all make boring products. It’s all business my friend. Forget the headlines, forget the brokers, buy the flavor of the century instead of the flavor of the month. Thanks for commenting.

    • Hi Charles,

      That’s a great way to help you sleep at night. Too much of a growth portfolio can certainly age you prematurely. For me, I stick with my dividend stocks exclusively and so far haven’t ventured into the REIT or MLP space though I do like a lot of health care REITs. I guess it all comes down to your SWAN (Sleep Well At Night) level. Personally, I can be disconnected from the market/Internet for days, weeks and months and sleep well with my current portfolio. I appreciate your comment and can respect your personal balance of growth stocks with dividend stocks.

  12. DivHut – I agree with each benefit mention and they are the reason my I now only invest in dividend paying stocks. 🙂 But I did want to ask you how sure you were of the 15% tax rule…I thought you had to own and receive dividends from a stock for a year before the dividends are considered qualified for the capital gains rate. Thanks in advance for clarifying. AFFJ
    A Frugal Family’s Journey recently posted…Dividend Stocks Portfolio (Update) – August 2014My Profile

    • Hi AFFJ,

      As you know the tax code has a million rules and exceptions. From what I know, 1) Dividends qualify for the 0% rate (tax-free) if you fall within the 10% or 15% tax brackets, 2) Dividends qualify for the 15% rate if you fall within most higher tax bracket, and 20% if you’re in the highest tax bracket (39.6%), 3) You must have held the stock for 60 days during the 121-day period that begins 60 days before the ex-dividend date. This, of course, applies to qualified dividends. Ordinary dividends are taxed as ordinary income. I stated the 15% as a general marker that most people fall into. As always, consult a tax professional who knows this inside and out. Thanks for stopping by.

    • Hi J,

      It’s all about the long term with dividend investing. Too often we are wired for immediate results without putting the time and effort to build something long and sustaining. The way I see it, passive income should cover 100%+ of expenses, ideally, but more realistic, even it it covers only 50% or 60% of your future expenses you’ll be ahead of most and in a far better situation than many.

  13. I think there is a great divide in the FI community if one should go with a DGI approach or the 3-4 index fund approach and I see the fund side getting very angry at the DGI side more often than the other way around. I think the 3 fund approach is great for someone starting out as an easy way to invest their money (and easy it is), but in the long run, even with Vangaurd funds, the fees are rough, esp with larger portfolios. I mean my modest portfolio with optimized low fee funds was costing $150+ a year in fees and yielding a whopping 2.15% in dividends, and the fees would only increase as the portfolio increased.

    I am glad I stumbled upon the various DGI sites in the past two weeks. I have a better understanding of my own portfolio, revenue sources, and forward direction towards retirement. Previously I had a little bit of this, a little bit of that, attempts to capture that stock du jur (still have a few and their holding fine from a growth perspective, but are doing nothing for me until I sell: WDAY, SCTY, TSLA), but I also had some DGI stalwarts in there: PG, APU, and O, along with the standard index tracking funds.

    • Hi Brian,

      Like you I have noticed the divide among the FI community in the method to achieve true independence. The way I see it, those seeking to invest exclusively in funds are seeking an easier, hands off approach as opposed to individual stock pickers. I know all the stats out there that say individual investors can’t pick stocks successfully over the long run but the way I see it most DGI investors are creating their own funds by buying 25-50 individual stocks to diversify and reduce risk and simply sit back and collect dividends. No investment can have a set and forget approach but as you mentioned, when you look at fund fees etc. over decades it really eats up a good chunk of your return. As you can see from my portfolio I hold no “hot” stocks, no social (YELP, TWTR, FB or hot tech like TSLA) just good old fashioned consumer and industrial stalwarts that have histories of paying increasing dividends for decades. Please feel free to stop by and ask questions about stocks, dividends, my portfolio, reasons why I bought certain stocks etc. Thanks you for stopping by and commenting.

      • TSLA and SCTY I got in early enough where they are just sitting there, both bought in 2012; I also like the philosophy behind each company and don’t mind owning shares in them. Being in the tech industry it is hard to not be drawn into all of hype of the latest tech and companies, good thing I’ve shifted my focus. I also work for one of those old stalwarts of tech, just wish we paid a better dividend 🙂

        I feel I have some pretty strong positions right now, just looking to expand when capital becomes available into additional sectors, including more international exposure: T, F, GE, OHI, CFFN, JNJ, ORI, TD, LEG, CTCM, OHT, GRMN, QCOM, BIP, and GULF.

        Thanks for the blog, I’ve garnered many new items for the watch list.

        • Hi Brian,

          Thanks for sharing your stock picks and I’m glad you find the blog useful. As you seem to be drawn to tech I am drawn to more conservative “everyday” type stocks. Nothing wrong with the tech space but for my long term portfolio I felt it was too difficult to select individual stocks and experienced wild gyrations more than other sectors. If you are looking to diversify a bit and want some very strong dividend payers I would suggest you read a post I wrote titled, “Dividend Aristocrats You Never Heard Of.” There are some great dividend gems on that list.

          • I’m not too heavy into tech, just been in the industry for 19 years, and it’s hard to not get wrapped up into all of the industry buzz, when quite a bit of time is spent with technology.

            Based on an overall portfolio analysis compared to the S&P 500, I’m pretty balanced in most areas except I’m light Industrials, Energy, and Consumer Staples, and I’m a bit heavy in Real Estate (the recent addition of OHI and UHT pushing me upwards). I’ve read the post and have been scouting out areas to add to the portfolio in the coming months to help balance things out.

            thanks again

            • Hi Brian,

              Many of the dividend income investors are heavy in the REIT and MLP sector because they are drawn to the relatively high current yield they offer. While this isn’t a bad thing on it’s own I think most are not fully aware of the risks of investing too heavily in those sectors. As you can see from my portfolio I don’t own any tech, MLPs or REITs (though I happen to like health care REITs for the long term). As you said it is all about finding a balance that you are comfortable with and can sleep at night. My portfolio is about 40% consumer staples and industrial which is high compared to the other bloggers you read. Thanks for commenting.

              • I’m using the REITs, esp the health care ones as a semi-short term booster to build up the dividend payout to assist in expanding into other sectors that I’m low in. Keeping my eye on them and I don’t know how long I’ll stay in them, but I do see that aging population increasing, so they might be there longer.

                Trying to play catch-up after being unemployed for 18 months a few years back. I feel I’m in a solid position now and I need to try and maximize things before retirement and my wife’s teacher pension kicks in. Who knew I married a sugar momma? 😀

                • Hi Brian,

                  Like you, of the whole REIT space health care is the one area that I see great long term growth and value. I have been looking at the bigger names, HCP, VTR and HCN with some smaller ones such as LTC, OHI and NHI too. The aging population in the U.S. pretty much ensures a large clientele for decades to come. Don’t be too eager to play catch up. I’d rather own lower yielding higher dividend growth stocks than current high yielding stocks that don’t increase their dividends at a fast clip. Thanks for commenting!

  14. What resource would you recommend for someone who has absolutely no clue about investing? A book, a class? Help! I got my master in social work and slave away year after year, barely making it :/ I would love to have the knowledge you all have to do this. I have no clue where to even start…. I appreciate the help!

    • Hi Kristen,

      For someone who has no clue about investing and dividend investing in general I would recommend you visit DivHut from time to time as well as the many other great investment blogs listed on the Blogroll. These are the sites I use to read and get inspired about dividend ideas and concepts of investing.

      I have found that the Financial Independence community is very helpful and willing to offer advice, tips and general knowledge no matter your investing skill level. Many of those sites are written in plain English for anyone to read. As far as a book I would recommend, The Dividend Mantra Way: Achieving Financial Independence By Living Below Your Means And Investing In Dividend Growth Stocks.

      Of course, if you ever have any questions feel free to comment or contact me via this site. I publish my real world stock portfolio holdings for all to see and chronicle every single buy I make. I think you will find that the online investment community is very transparent as we all put our money where our mouths are. This way you can actually follow along our real world investment successes and failures as my portfolio and others you will see online are real and not theoretical. I hope this helps you in some way. Again, please feel free to contact me again with any other question you may have.

    • Hi Ed H,

      You are referring to DRIPs in which case you are correct in that some companies do charge fees to reinvest dividends. However, these days with companies such as Sharebuilder and Scottrade, to name a few, dividend reinvestment is totally fee free. With Sharebuilder you have the option to take your dividends as cash or simply reinvest automatically at no charge. Scottrade offers a FRIP program where you can decide where you would like your dividend distribution to go. In other words, a dividend received from Coke can be set to buy Pepsi. All this is fee free. Being able to reinvest without paying fees is a great way to compound returns faster which are only magnified over the long term. Thank you for stopping by and commenting.

    • Hi Thad,

      I always like to mention the trifecta of dividend investing where fresh capital, dividend raises and compounding effects of time can really result in some impressive gains over the years. With proper diversification and a relatively hands off approach it is possible to create an ever increasing passive income stream. Thank you for stopping by and commenting.

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