Whether you’re nearing retirement or have many years of work ahead of you, it’s important to create an investment strategy that fits your goals and risk tolerance. And part of your strategy may include loading up on dividend stocks.
Many retirees end up appreciating their dividend stocks because those payments can serve as a nice supplemental income stream. Social security advantages. Dividend paying stocks can also be a solid investment for young wealth builders. But if you’re going to develop an investment strategy focused on holding dividend stocks, you’ll need to keep these important points in mind.
1. Dividends are not guaranteed
Some companies choose to share their wealth with investors in the form of dividends. But businesses are not contractually obligated to pay dividends any more than companies that issue bonds are required to pay interest. Therefore, a company that starts paying dividends can discontinue the practice as it sees fit. Therefore, you cannot automatically count on constant dividend payments from the companies you own and pay them.
However, if you load up on companies with a strong history of not only paying dividends, but also increasing them, the chances of them continuing to generate those returns increase. You can consult this list Dividend Aristocrats to identify such companies for your portfolio.
2. Higher yielding dividends aren’t always worth chasing
It may be tempting to fill your portfolio with stocks that pay higher dividends. But what you might gain in bigger payouts, you might lose in less appreciation of the stock.
Dividends paid by companies represent money that is not reinvested in those businesses. And that could lead to slower growth — and less upside for your stocks themselves.
Also, keep in mind that high dividend payouts don’t necessarily indicate a company’s success. Think about the people you see driving fancy cars. Owning such vehicles does not automatically mean that these people are rich and in good financial shape – it just means that they have chosen to spend their money in a certain way. The same concept applies in the world of dividend stocks, so be careful and look at the big picture rather than just focusing on the generous dividend yield.
3. It’s great to reinvest your dividends
When you are retired, you can count on dividend payments as a source of income. But if you’re not retired, you should consider reinvesting the dividends you receive rather than cashing them out. It’s a great way to keep growing your portfolio – and build more wealth over time. Many brokerages these days make it easy to set up reinvestment of dividends so your payments start automatically without you having to go in and do anything.
There are many good reasons to include dividend stocks in your investment strategy. But be sure to keep these points in mind as you begin the process of building your portfolio.
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