As an investor, we are always onto the lookout for investment options which can expand our wealth generation. There are plenty of investment options in the market ranging from low-risk ones to high risk. One such investment option that is preferred by many is dividend stocks. Dividend stocks are a wise investment option and can be one of the major sources of passive income.
Not many can boast of bearing the potential for capital appreciation and regular income. Dividend stocks come in all forms and sizes and are massive passive income sources in the long run. They are part of many investors’ portfolios starting from the novice to the high-end experienced heads.
There are plenty of reasons why dividend stocks have taken up such an important place in the market and why you should look to invest in it. Read along.
6 Reasons why you should invest in Dividend Stocks
Here are six reasons why you should invest in dividend stocks. Let’s check them out.
- Almost guaranteed growth and expansion of profits
One of the major benefits of investing in dividend-paying companies is that they tend to grow with time. Generally, the consensus is that any company which offers a dividend to the public is considered to be financially stable which adds a layer of assurance to your investment. A well-established company will likely increase the dividend payouts year on year basis. If you look at the historical records, you will likely find companies who have been offering dividends on an increasing rate for over the last 10 years and the rates of dividend yield are substantially higher than what fixed income-based investments like government bond yields. This speaks of consistency from the company where your investment will yield passive income for a long haul whilst continuing the growth in your wealth value.
- Source of passive income
Although people deem dividend income as something that’s merely a source of passive income, it can be part of your regular passive income source. If you take time to build a diversified portfolio in the long run like 7 to 10 years then your investment will yield substantial dividend income where you can receive regular payouts and make it part of your income strategy. It can even be your perfect retirement scheme.
- Your investment remains stable even during a down market
A major thing for dividend-paying companies is that even though market risks are inherent they are still on course for stable performance and the fluctuations will create a minuscule effect on the outcome. The reason behind this is that a company cannot pay dividends until they have profits to share for. If you opt for a company that has a stable dividend offering over time, your stocks will yield dividend income even when the market hits a bit of rough patch as the company is well equipped to handle this scenario based on their long term stability. Even if the company goes through the dip in the valuation of the shares for say, 80 or 90 from the initial purchase rate of 100 due to short term volatility, the company may still continue to offer dividend because of the profits which allow you to generate income even in the short term volatile market.
- Helps build your wealth faster
You can always reinvest the dividend income offered to you in order to attain more stocks in the market. Using the money to buy new stocks from dividend income is almost like getting free shares without any payout from your pocket. This allows you to buy more of dividend-yielding stocks in the market and thus creating a base for generating greater wealth over time. With more shares, you can enjoy higher dividend income all the while seeing your shares grow in value.
- Exemption from Taxation liability
As per the Income Tax Act, 1961, dividend income up to Rs 10 lakhs is exempt from taxation with any excess of Rs 10 lakhs shall attract an income tax at the rate of 10%. This means any income that you yield in the form of dividends will rest along with you and will not attract the tax if you fall under the bracket. Savings of taxes in itself is an income generation if you look at the opportunity cost theory. You can reinvest that amount back for additional shares and seek greater wealth generation opportunities.
- Basis for Diversification
There are various investment options available in the market in the form of stocks, mutual funds, commodities and more. Stocks in itself comes across as growth stocks and dividend-paying stocks. A thing that may go unnoticed about dividend stocks is that they are a great way to diversify your portfolio. While growth stocks are there for the long run, dividend-paying stocks are a great way to generate passive income all the while also having an opportunity for seeing your wealth grows with the time. It’s something that is part of every investor’s portfolio from the novice to the experienced head. With almost guaranteed yield and opportunity to see the wealth grow multifold, dividend stocks are one of the safest best in the investment market. Every willing investor is advised to build up a portfolio inclusive of the dividend stocks.
Types of Dividend
There are two main types of dividends that a company provides, i.e. cash dividend and stock dividend. Read along:
- Cash Dividend
The cash dividend is a payment that is made by the company out of its profits to the shareholders in the form of cash. This act transfers the economic value of the shares to the shareholders rather than vesting the money into the operation. Any shareholder receiving dividend needs to pay tax on the dividend received. These are a great passive source of income for shareholders.
- Stock dividend
- Stock dividend is a dividend offering in where shareholders are offered new shares in the company. This, in turn, increases the number of shares in the company. Normally this is done in cases when the liquid cash is of short supply and the company intends to distribute the dividend. For many investors seeing a cash reward is one of instant gratification but in many ways, stock dividend can be a good option. With no tax liability and potentiality to see your stocks grow multifold, stock dividend is a good choice to go with.
Dividend stocks have the potential to grow your portfolio and set you in the course of wealth generation. They also are one of the safest and equally rewarding investment options and can aid you in the long run. With key benefits like tax exemption and minuscule effect of market changes, they remain a formidable option and something people should add to their portfolio.