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What Are Dividend Stocks?

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Jason is a longtime Investor and an advocate for having a personal finance strategy and personal savings to have financial freedom.


If you are a new investor or wanting to learn more about different types of stocks, dividend stocks will probably be one of the first types you become familiar with. Depending on your investment strategy and what your goals for investing are, dividend stocks could be great opportunities for your portfolio. In this article, we will go over what dividend stocks are, the pros and cons of investing into dividend stocks, example of dividend kings, and my personal experience with dividend stocks and if I would recommend them.


What Are Dividend Stocks?

Dividend stocks are companies in the stock market that pay you for being an investor into their company, and how much you are paid depends on how much you have staked in the company. Typically, most companies pay their dividends monthly or every quarter. This can be one of the easiest ways to generate a consistent cash flow or a passive income portfolio.

So how does the process work? What companies that pay a dividend do is at the end of either every month or every quarter, if they have a surplus of revenue or have its own fund dedicated to paying dividends, companies will turn around and reward their shareholders with this extra cash at the end of the earnings cycle. How much you are paid typically depends on how many shares you have staked in the company. Let's say you have one share of a company that pays 25 cents per share every quarter. You will be paid directly a check at the end of every quarter for 25 cents. Of course, if you own 10,000 shares of the same company, you then be paid $2,500 at the end of every quarter, and so on. You can also opt to have your dividends re-invested into the company each time it is paid out, increases your share count and how much in dividends you are paid over time. Most companies that commit to paying a dividend typically stick with it for the long-term, if not forever, so this can be a great way of having that guaranteed passive income at the end of each earnings cycle.


Pros and Cons

Like any other type of stocks, dividend stocks can have many benefits and many risks. Depending on your financial and investment goals, this can influence your risk assessment.

Some of the positive benefits of dividend stocks are they typically are long established and stable companies, Coca-Cola and Pepsi being two examples. Companies that are all over the world and are recognized brands that show no signs of slowing down anytime soon. They are generally faithful about fulfilling their dividend payout at the end of every cycle. This is income you do not have to work for, simply just putting your money into the company is enough to earn a dividend. It is arguably one of the easiest forms of income you can have. Additionally, many companies may raise their dividend payout over time, rewarding you over the long-term. These are called Dividend Kings, which we will touch on later.

Risks that come with dividend stocks can vary. One of the most common risks are companies potentially cutting or slashing their dividends if projected earnings are not met or if there is a major disruption in the company. An example of this is many of the major airlines, such as American Airlines and Delta Airlines, cut their dividends completely during the 2020 Covid Lockdowns since few people were flying. However just because a dividend is cut, it does not mean it will not come back in the future. Another potential downside to dividend stocks is you typically need a lot of capital in order for your passive income to have a major significance. An example of this is as of June 2022, in order to earn $1,000 in dividends every quarter from AT&T Inc (T), you would need to hold roughly 3,600 shares, or nearly $75,000 based upon $20.72 per share with a 28 cent dividend paid out every quarter. This is considered a more attainable dividend stock, least amount of money possible with a relatively high dividend. For many people, this would not be a financial goal that can be achieved in the short-term.

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Another aspect about dividend stocks are like any other type of income, you are required to claim all dividend payouts on your taxes at the end of the year.

It can require a lot of hard work to achieve your investment goals with dividend stocks, but the rewards can potentially be the gift that keeps on giving. As you should with every type of stock, make sure to do your due diligence and research when making your financial goals.

The King Of Stocks?

The King Of Stocks?

Dividend Kings

Dividend Kings are companies that have faithfully paid their dividends at the end of their earnings cycle and have increased their dividend payouts consistently over the course of 50 years. These type of companies are regarded as some of the safest dividend stocks you can invest into, and it is not too surprising based upon the companies that are labeled as Dividend Kings. Some examples are Coca-Cola, Johnson & Johnson, and Target. Companies that we typically see and use its products on a daily basis. If you decide that dividend stocks are something for you, these are some of the companies to keep an eye on first.


My Experience

Personally, I have been a fan of dividend stocks and like the idea of having income I do not have to work hard for. The hardest part is raising the capital to make holding the dividend stocks worthwhile and consistently investing into them. These are not stocks that you typically invest into for long-term growth, as their share prices typically stay leveled over the long-term. When you are investing into these stocks, you are more than likely investing because it is a company you like and for the dividend. As I mentioned earlier, these are typically safe companies to invest in. I am sure most of us can agree Apple, Coca-Cola, and Pepsi are going to be around for a long while so if your investment strategy is for passive income, this might be a good opportunity for you.

If you are a day trader or an investor looking for long-term growth, these are stocks that you might want to hold off on for the time being. Once you have met your long-term financial and investing goals, placing your long-term gains in dividend stocks could potentially be a safer and more stable avenue to take with your money. It can be an option to explore.


Final Thoughts

So would I recommend dividend stocks for you? It depends on your investment strategy and your long-term goals. As I stated previously, dividend stocks can be one of the easiest and safest places to place your money for income. You do not have to work for it and it is generally reliable for the long-term. If you are looking for long-term growth, it might be something to keep in mind for the future, as these stocks are typically stable. I hope you found this article helpful and I wish you the best in your financial and investment endeavors.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Jason

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