2 advantages — and 2 disadvantages — of owning dividend stocks | Smart Change: Personal Finances
The choices you make as an investor can dictate whether you end up achieving your financial goals, which may include sending your kids to college or retiring comfortably at a relatively young age. And one decision you’ll likely face is whether to load your portfolio with dividend-paying stocks.
Many investors specifically choose dividend stocks because they like the idea of generating ongoing income. But dividend stocks aren’t necessarily the perfect investment for you. Here are some advantages – but also some disadvantages – of favoring dividend-paying stocks.
Advantage n°1: you benefit from a double opportunity to earn money
Your goal as an investor is to make money, and dividend-paying stocks could achieve this in two ways. Like all stocks, dividend stocks can go up in value over time, so if, say, you buy stocks at $200 each, they could be worth $800 down the line.
Meanwhile, companies that pay dividends often make the decision to increase those payments over time. So you could end up with dividends that increase significantly over the years.
Advantage #2: You get money to reinvest
Finding money to invest isn’t always easy, especially when the cost of living continues to eat away at your income (thank inflation). The benefit of owning dividend stocks is that you will receive ongoing payments that you can set up to reinvest, further increasing your portfolio.
Disadvantage #1: You could end up with a higher tax burden
Most of the dividends you receive as an investor will likely be eligible dividends, meaning they won’t be taxed at as high a rate as your ordinary income. But if you hold dividend-paying 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 dividends will not save you from paying taxes. These payments will still count as income, even if you don’t take the money and run away.
Disadvantage #2: Your inventory may not grow as much as you would like
Companies that pay dividends make the decision to share a portion of their profits with their shareholders. This may seem like a good thing at first glance, but every time a company pays a dividend, that money is not reinvested in the company itself. As such, you may find that the dividend-paying stocks you hold in your portfolio do not gain as much value as your non-dividend-paying stocks.
Are dividend stocks right for you?
Obviously, there are pros and cons to loading on dividend-paying stocks. Consider your needs and goals when deciding if they are right for you.
Ultimately, be aware that it’s not a good idea to buy shares of a particular stock for the dividend payments alone. Instead, put your money into businesses you believe in. It doesn’t make sense to buy shares of a company you think is a disaster just because there’s a generous dividend available.
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