Whether you're nearing retirement or have many more years in the workforce ahead of you, it's important to establish an investing strategy that aligns with your goals and risk tolerance. And part of your strategy may involve loading up on dividend stocks.
Many retirees end up appreciating their dividend stocks, because those payments can serve as a nice income stream to supplement Social Security benefits. Dividend-paying stocks can be a strong investment for younger wealth-builders, too. But if you're going to establish an investing strategy that focuses on holding dividend stocks, you'll need to keep these important points in mind.
1. Dividends aren't guaranteed
Some companies opt to share the wealth with investors in the form of dividend payments. But businesses aren't contractually obligated to make dividend payments the same way companies that issue bonds have to make interest payments. So a company that starts out paying a dividend can halt that practice as it sees fit. As such, you can't automatically bank on getting ongoing dividend payments from the companies you own that dish them out.
That said, if you load up on companies with a strong history of not only paying dividends, but also increasing them, then the chances of continuing to receive that income are greater. You may want to consult this list of Dividend Aristocrats to identify such companies for your portfolio.
2. Higher-yield dividends aren't always worth chasing
It can be tempting to fill your portfolio with stocks that pay higher dividends. But what you might gain in larger ongoing payments, you might lose in the form of less share price appreciation.
The dividends companies pay out represent money that's not being reinvested in those businesses. And that could lead to slower growth — and smaller gains with regard to your shares themselves.
Also, keep in mind that large dividend payments are not necessarily indicative of a company's success. Think about those people you see driving around in fancy cars. Owning such vehicles doesn't automatically mean those people are wealthy and doing well financially — it just means they've opted to spend their money a certain way. The same concept applies in the world of dividend stocks, so be careful to look at the big picture rather than fixating on generous dividend yields alone.
3. It pays to reinvest your dividends
If you're retired, you may be reliant on your dividend payments as a source of income. But if you're not retired, it pays to consider reinvesting the dividends you receive rather than cashing them out. 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 dividend reinvestments so your payments get put to work automatically without you having to go in and do a thing.
There are lots of good reasons to incorporate dividend stocks into your investing strategy. But be sure to keep these points in mind as you go about the process of setting up your portfolio.
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