2 Advantages – and 2 Disadvantages – of Owning Dividend Stock | personal financing

(Morri Bachmann)

The choices you make as an investor can determine whether you will achieve your financial goals, which could be putting your kids through college or comfortably retiring at a relatively young age. And one of the decisions you are likely to face is whether to load your portfolio with dividend stocks.

Many investors specifically choose dividend stocks because they like the idea of ​​generating continuous income. But dividend stocks are not necessarily the ideal investment for you. Here are some of the advantages—but also, some disadvantages—of weighting over dividend stocks.

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Benefit #1: You get a double chance to make money

Your goal as an investor is to make money, and dividend stocks can do that in two ways. Like all stocks, the value of dividend stocks can rise over time, so that if, for example, you buy shares at $200 each, they could be worth up to $800 in the future.

Meanwhile, dividend-paying companies often make the decision to increase those payments over time. So you could end up with profits that grow exponentially over the years.

Benefit #2: You get cash for reinvestment

Finding the money to invest in isn’t always easy, especially when the cost of living continues to eat up your income (thanks to inflation). The upside to owning dividend stocks is that you will get ongoing payments that you can prepare for reinvestment, thus growing your portfolio further.

Drawback #1: You may end up with a higher tax burden

Most of the dividends you will receive as an investor will likely be qualified dividends, which means that they will not be taxed at a high rate like your regular income. But if you hold dividend stocks in a regular brokerage account, as opposed to an IRA or 401(k) plan, those dividend payments will add to your tax bill.

To be clear, reinvesting your earnings won’t get you out of paying taxes. These payments will still count as income — even if you don’t take the money and run.

Disadvantage #2: Your stock may not grow as much as you want it to

Dividend-paying companies make a decision to share some of their profits with their shareholders. This may seem like a good thing at first glance, but any time the company pays a dividend, that money is not reinvested in the business itself. As such, you may find that the dividend stocks you keep in your portfolio do not gain the same value as your non-dividend stocks.

Is Dividend Stock Right For You?

Obviously, there are advantages and disadvantages to loading dividend stocks. Think about your needs and goals when deciding if it’s right for you.

In the end, know that it is not a good idea to buy shares of a particular stock for dividends alone. Instead, invest your money in businesses you believe in. There is no sense in buying shares in a company that you think is a disaster just because there are generous dividends available.

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