Dividend Investing - Pros and Cons of Dividend Investing

Investing for dividends is an excellent way to participate in the stock market. Dividends represent the sharing of a company's profits with those who hold stock.

There are two kinds of stock: common and preferred. Common stock pays no or low dividends; preferred stock customarily pays a dividend on a regular basis. The investment return on common stock is from a hoped-for increase in the company's share price over time. The investment return on preferred stock is a combination of current payment of dividends as well possible long-term increase in share price.

An investor may purchase individually owned shares of companies which pay dividends. Or, an investor may purchase shares of a mutual fund which has the objective of owning dividend-paying stocks. The latter is generally considered a more conservative approach since your investment risk is spread out among the larger number of companies in the portfolio.

Pros of Dividend Investing:

1. Dividends create a source of cash for re-investment. There is a continuing stream of cash created by dividends. Re-investment of the cash in the purchase of additional shares is a great way to grow your portfolio.

2. Dividends create a source of cash for monthly income needs. At some point in your life, you will need income from something other than work. Having a flow of dividend income is a wonderful way of planning for your economic freedom.

3 Dividend investing benefits from dollar-cost-averaging. Constant re-investment of dividends over time creates an average cost basis. The theory is, that through continuous purchasing of shares, the average cost will be lower than the current price.

4. Dividends offer a source of earnings in a down market. Investor frustration and fears rise during a market decline. Dividend investors can take solace from the fact that there will be profits from their portfolio during the downturns.

5. Dividends pay you profit now. For many people, receiving money right now as profit on their investment is more comforting than waiting for the share price to rise. "A bird in the hand is worth two in the bush," is an adage you can apply to dividend investing.

Cons of Dividend Investing:

1. Dividend income is subject to ordinary income tax. Every year investors must pay income tax on dividends from stocks held less than one year. For stocks held longer than one year, the capital gains rate applies, fifteen percent for those people in the upper tax brackets.

2. Dividends are not a guaranteed payment. Dividend payments are subject to change. If the business of a company is not as profitable as it once was, the company may choose to lower or suspend dividend payments. The risk that any one company may have poor results may be lessened by diversification.

3. Dividend investors may not make as much profit on share price increases as common stock investors. Since dividends are a recognition and payment of profits, dividends are part of the company share value. With a common stock, most--if not all--of the share value comes from a rise in market price. Some investors believe that there is a greater potential return from common stocks. However, there may also be a greater market risk.

4. Dividend-paying stock prices may go down when yields rise in the market place. Companies that pay dividends compete with other investment choices. The dividend yield can be an attraction. However, when yields generally rise and investors can get higher yields elsewhere, the yield of a lower-than-market dividend may be offset by a lowering of share price to make up the difference.

As with any investment, you would do well to remain vigilant in assessing factors which affect the value of your portfolio. Take an interest in how your investments work. You will be more at ease in knowing what to expect.

Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a Broker-Dealer firm that specializes in monthly dividend income funds.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller

This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.

Copyright 2011

http://www.monthlydividendcheck.com/

How Do Bank Interest Payments Compare With Dividend Payments?

Banks pay interest as rent for the use of your money. This concept is substantially different from a sharing of business profits, like dividends. Because interest is an expense, banks prefer to pay the lowest rate possible to attract your money. Banks benefit from the spread between the interest they pay you and the interest and fees earned from loaning your money to others. Like dividend payments, bank interest payments are subject to change.

Dividends, on the other hand, are a distribution of profits by companies to their shareholders. Profits indicate that a company is financially successful. Linking your income stream to companies that enjoy business success may be preferable to receiving interest declared by the bank. Owning a diversified pool of companies through a mutual fund may help spread the risk that any particular company may experience adverse business results. While you have investment risk when receiving dividends, you also have the possibility of an income yield that may be higher than interest paid by the bank.

Dividend-paying stocks may offer a better hedge against inflation than a bank account. When the cost of goods and services rise in an inflationary period, companies that produce those goods and services raise prices to offset the higher costs of doing business. In raising prices, companies maintain their profit margins and distribution of those profits to shareholders. Banks, on the other hand, pay interest rates that do not take inflation into account. If you receive 1% interest on your certificate of deposit or savings account, but the annual inflation rate is 4%, the value of your deposit has eroded by 3% in purchasing power over the course of a year.

Both short-term dividends (held less than one year) and interest are taxed at the ordinary income rate in the year paid. There is no tax advantage to either one as a source of income. Long-term dividends (held more than one year) are taxed at either 0% or 15%, depending on your tax bracket. There are some tax provisions that affect the shares that produce dividends. Stock values may increase or decrease, unlike a bank account deposit value which remains the same. An increase in stock portfolio value, when sold for a profit, will be taxed at a capital gains rate--which is currently lower than the ordinary income tax rate for most people. A decrease in portfolio value, when sold for a loss, may be deducted from taxable income as a capital loss.

If you need to know that your investment amount will be insured against loss, then the bank account is for you. Everyone has some assets that fall into this category. However, for those who are willing to have a portion of their assets at work in the business marketplace, dividend income is an attractive vehicle for participating in the distribution of profits.

Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a Broker-Dealer firm that specializes in monthly dividend income funds.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller

This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.

Copyright 2011 Sharemaster

http://www.monthlydividendcheck.com/