As an investor, we are always onto the lookout for investment fields which will expand our horizon. 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 are deemed as much safer than the growth stocks or other stocks.
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 investor’s 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.
Source of stable income
Although people deem dividend income as something that’s merely a source of passive income, it can be part of your regular stable 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.
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
A thing that may go unnoticed about dividend stocks is that they are a great way to diversify your portfolio. 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 multi fold, 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 Stocks to invest in
There are different ways to invest in dividend stocks and we have picked up a couple to illustrate down below. Read along:
Dividend Exchange-traded funds (ETF) share similar properties to mutual funds apart from the fact that they are traded on exchanges. With dividend ETFs, you will have the opportunity to hold onto a pool of dividend-yielding shares that are transparent and flexible in nature.
It’s a bit hassle-free and has become one of the major attractions these days. They tend to offer a hassle-free option to users as there’s instant diversification all the while providing safety of payout.
Individual dividend-paying stocks
In this dividend stock, you need to search and find the dividend stocks worth investing in. You can either conduct market research or go for professional help to find the best stocks to choose from.
This one requires a hand-on approach from the investor unlike the dividend ETFs. Look for factors like historical trends and conduct fundamental analysis before you invest in individual dividend-paying stocks.
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.