Why should people invest in Dividend paying stocks?

Highlights

• Dividend-paying stocks are popular as they benefit investors through capital appreciation and payouts.
• Generally, well-established companies pay a dividend.
• Being stocks of established companies, dividend stocks reduce the overall risk of the portfolio.

Dividend-paying stocks are quite popular amongst investors as they allow investors to profit in two ways. One is through stock price appreciation, and another is through payouts made by the Company. By definition, a dividend refers to the portion of income that the business allocates to its shareholders.

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Generally, dividends are distributed by established companies to create goodwill in the market. The amount of dividend offered by the Company to its shareholders reflects the Company’s confidence in its future earnings plus the sustainability of the business. It indicates reliability and indicates that stocks would give good returns in the future.

Such companies generally have a strong market presence. Thus, holding stakes in such companies can offer regular income and can generate higher yields in the future. Seeing these benefits, many investors tend to reinvest their income generated through these dividend stocks and reap the benefits of dividend reinvestment.

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On that note, let us quickly look at the reasons why people should invest in dividend stocks.

Increase in profit

One of the primary reasons to opt for dividend stocks is that these companies grow gradually with time. Most well-established companies generally tend to increase their dividend each year.

Investors can generate income without selling stocks

There are several ways an investor can make money in the stock market. Investors can sell the underlying stock and generate income. There is another way in which investors can generate income without selling the stock. It is through investing in dividend stocks. However, the amount of income would depend on the size of the portfolio.

Dividend helps in equity evaluation

Equity valuation helps to estimate the value of the firm or its securities. Generally, an analyst uses financial metrics to assess any particular stock. However, there could be challenges as analysts solely depend on financial statements while analysing the stocks. This is so because there are possibilities that companies might manipulate their financial statements, which might be misleading.

However, if one assesses the Company’s dividend history, it indicates how strong the Company is. Constant dividend, YoY dividend growth indicates the Company’s growth and profitability. In addition, it suggests that the Company has steadily grown and has generated profit in the past.

Dividend stocks help to reduce risk and volatile

Dividend stocks are generally stocks of well-established companies. Dividend helps in reducing the overall risk of the portfolio. It acts as a cushion to support any loss in the overall portfolio due to falling stock price. In most cases, historically, it has been proven that dividend stocks have surpassed the non-dividend paying stock during the bear market phase.

Dividend stocks can help to beat inflation

Generally, the long-term annual rate of inflation is in between 3 to 4%. However, there are many dividend stocks which payout more than 5% per year. The payouts of these companies might increase each year. Thus, these stocks can help investors to beat inflation.

Dividend-paying companies are generally stable

When compared to non-dividend paying companies, it is seen that the dividend-paying companies are stable. These companies have a strong presence and grip over the market. Further, the management of these companies is experienced and has grown the Company to an extent where the Company has more income required to grow the business.

Bottom Line:

The above features of the dividend stocks are some of the key points which an investor can consider while investing in dividend stocks.