What is a Dividend stock?

A stock represents your share in a company you invested in. While the term dividend stock implies the payment made by a well-established company as a reward to its shareholders either in form of cash or in form of additional stock. The dividend is often determined by the board of directors of the company and it can be paid monthly, quarterly, or annually. Dividend stock is a strong way of earning more passive income.

Although before the dividend pay-outs can be received, the shareholder must reach the requirement of being a “shareholder of record” and the stock must be bought before the ex-dividend date. Most investors focused on two areas of dividend stock which are dividend growth and high dividend yield. Investing in dividend stock is a way to grow a long-term wealth. In the words of Daren Blonski (the managing principal of Sonoma Wealth Advisor in California) “dividend stock offers another level of confidence to the investor”. Companies pay a dividend for different reasons, some of which are to maintain the investor's trust and to offer instant tax-free gains. Investing in dividend stock is a way to grow long-term wealth. As Stephan Jarislowsky says “dividend stock has several advantages since 1926 dividend has accounted for about 42% of investors returns, while being less volatile than the market, to some extent the dividend acts like an anchor slowing the stock down. The beauty of dividend is that you get paid, whether or not the market is up”. There are significant reasons to invest in a dividend stock, it is loaded with lots of benefits which include but not limited to:

  1. Dividend stock is a reliable source of income
  2. The dividend stock has a special tax advantage. It has a qualified dividend tax rate.
  3. Dividend stock as a protective guide over market downfall. Even though the market downturns or its value drops, it does not affect the investment.
  4. The dividend portfolio gives you the freedom to decide on what to do with your cash flow.
  5. It enables investors to reinvest the dividend instead of collecting cash distribution.

The long goal

Investing in stocks that pay monthly dividends is more profitable especially for those who want to maximize their retirement income. One of the things that inspire people to invest in monthly dividends is the privilege they offer to investors for compounding and reinvestment. Dividend reinvestment is the use of dividend funds to purchase more share stocks. While compounding in this respect, it does not refer to the compound interest which is commonly regarded as the interest on a loan and is calculated based on the initial principal and other accumulated interest from the previous period of loans. But concerning dividend stock, compounding is the interest that is earned from the investment. It is reinvesting your interest. This is one of the most powerful ways of creating wealth. Investing in stock that pays monthly dividends to enhance steadier income which you can advantageously use to pay your utilities, mortgage, and monthly subscriptions. In the same vein, reinvesting the dividend payment provides quality compound value which allows the initial investment and earning to work for you (this is superb, it’s easier to allow your money work for you than you working for money). Therefore, monthly dividend stocks give greater potential for compounding growth and also provide greater flexibility when selling your stock. Compounding dividend has the power of adding tangible profit to your investment portfolio as it takes into account your initial principal investment along with the accrued interest.

Although before investing in a dividend stock, you need to be sure of at least three things:

  • You need to have an investment goal, that is a financial goal.
  • You have to understand the divided stock you choose. With the aid of market value ratios, this can be effectively done.
  • You need to engage in proper research and analysis on dividend history.

Hopefully, as you take a step on investing in a dividend stock, you need to look out for the type of industry the company is operating, the company's competitive advantage, and the company’s board of director’s business experience. “All that is to investing is picking good stock at good times and staying with them as long as they remain good companies” ~ Warren Buffett.

September 26, 2020