Whether you’re about to retire or have many years in the workforce ahead of you, it’s important to develop an investment strategy that aligns with your goals and risk tolerance. And part of your strategy might include loading up on dividends.
Many retirees end up underestimating their earnings stock, as these payments can serve as a good source of income to supplement social Security Benefits. Dividend-paying stocks can be a solid investment for younger wealth builders, too. But if you’re creating an investment strategy that focuses on holding dividend stocks, you’ll want to keep these important points in mind.
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1. Dividends are not guaranteed
Some companies choose to share wealth with investors in the form of dividend payments. But companies are not contractually obligated to make dividend payments in the same way that companies that issue bonds are required to make interest payments. So a company that starts paying dividends can stop this practice as it sees fit. As such, you can’t automatically count on getting ongoing dividend payments from the businesses you own and are laying off.
However, if you load companies with a strong history of not only paying dividends, but also increasing them, the chances of continuing to receive this income are greater. You may want to refer to this list Distributed Aristocrats To select these companies for your portfolio.
2. High-yield dividends aren’t always worth pursuing
It can be tempting to fill your portfolio with stocks with higher dividends. But what you may gain from the larger ongoing payments, you may lose in the form of a lower appreciation of the stock price.
Dividends of companies that pay dividends represent money that has not been reinvested in those companies. This could lead to slower growth – and fewer gains in relation to your stocks themselves.
Also, keep in mind that large dividend payments do not necessarily indicate a company’s success. Think about the people you see driving around in luxury cars. Having such vehicles does not automatically mean that these people are wealthy and doing well financially – it just means that they choose to spend their money in a certain way. The same concept applies to the world of dividend stocks, so be sure to look at the big picture rather than focusing on generous dividend returns alone.
3. It is beneficial to reinvest your earnings
If you are retired, you may rely on your dividend payments as a source of income. But if you’re not retired, it’s worth considering reinvesting the dividends you receive rather than cashing them in. Doing so is a great way to continue growing your portfolio – and building more wealth over time. These days, many brokerages make it easy to set up Reinvest profits So that your payments run automatically without you having to go in and do anything.
There are plenty of good reasons to incorporate dividend stocks into your investment strategy. But be sure to keep these points in mind as you go through the process of creating your portfolio.
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