Why (& When) to Consider Dividend Stocks in Your Portfolio (2024)

FAQs

Why (& When) to Consider Dividend Stocks in Your Portfolio? ›

Investors seeking income often turn to dividends because of their advantages over bonds and bank deposit accounts. Dividends not only provide consistent cash flow, but they can also allow investors to participate in the appreciation of the asset as well.

Yes, there are a lot of advantages. However, there's also a price to pay for those benefits. The most obvious advantage of dividend investing is that it gives investors extra income to use as they wish. This income can boost returns by being reinvested or withdrawn and used immediately.

There is no hard and fast rule for how many dividend stocks to start a portfolio, but a good starting point is to aim for a minimum of 10. This will give you a good mix of different companies and sectors and help to diversify your risk.

You have to own a stock prior to the ex-dividend date in order to receive the next dividend payment. If you buy a stock on or after the ex-dividend date, you are not entitled to the next paid dividend.

There are a couple of reasons that make dividend-paying stocks particularly useful. First, the income they provide can help investors meet liquidity needs. And second, dividend-focused investing has historically demonstrated the ability to help to lower volatility and buffer losses during market drawdowns.

Dividends are not guaranteed. A company may decide not to pay dividends any further. Alternatively, may choose to reduce their dividend. Another con of dividend investing for passive income is the eventual ceiling of returns.

What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.

Most studies use the fully diversified portfolio as a benchmark and then derive that a portfolio of 20-30 stocks achieves a 'similar' risk profile as the target portfolio.

How long should you hold dividend stocks? ›

If you buy a stock one day before the ex-dividend, you will get the dividend. If you buy on the ex-dividend date or any day after, you won't get the dividend. Conversely, if you want to sell a stock and still get a dividend that has been declared, you need to hang onto it until the ex-dividend day.

The key is to find a company that blends a high yield with a sound business model that can support earnings growth, and in turn, a higher dividend. Here's why Brookfield Renewable (NYSE: BEPC) (NYSE: BEP), Vitesse Energy (NYSE: VTS), and Chevron (NYSE: CVX) stand out as three high-yield stocks to buy now.

Most companies pay dividends quarterly or semi-annually. They have specific payment dates on the last day of each quarter or every six months, respectively. For instance, Procter & Gamble (NYSE: PG) follows a quarterly schedule and often pays dividends in February, May, August and November.

The 20%-25% Profit-Taking Rule in Action

View the chart markups below to see how — and why — you want to take most profits once a stock is up 20%-25% from its most recent buy point.

No matter what stage of life you're in, dividend-paying stocks can be a great way to supplement your income and improve your portfolio's growth potential. Just be sure you research the companies' overall financial health, not just their dividend rates, before investing.

As part of a diversified portfolio, dividend stocks have their place. They offer relative stability, may pay increasing amounts over time and may provide steady income. But relying too heavily on dividend stocks as a primary investment approach could put you at risk and reduce your long-term investment gains.

Stocks and Funds That Pay Dividends

Dividends are not a bad thing, but they are considered taxable income in the year you receive them. If you're invested in stocks or funds that generate a lot of dividend income, your current-year tax bills may be high.

Living off dividends is a financial strategy that appeals to those aiming for a reliable income stream without tapping into their investment principal. This approach has intrigued many investors, from early-career individuals to those nearing retirement.