Why dividend investing?

Investing in high dividend stocks is a strategy that gives to private investors two sources of potential income: one, the predictable cash flow from regular dividend payments, and two, capital appreciation of the stock over time. Buying high dividend shares can be a great approach for investors looking to generate income or to build wealth by reinvesting dividend payments.

Investing into dividend stocks is a strategy that can also be appealing to investors looking for lower-risk investments. Stocks that pay dividends can be some of the least volatile to own. But there are still pitfalls, and dividend stocks can be risky if you don’t know what to avoid.

How dividend stocks work

Let’s look at an example. Say you buy 100 shares of a company for $10 each, and each share pays a $0.30 annual dividend. You would have invested $1,000, and over the course of a year receive $30 in dividend payments. That works out to a 3% yield — not too shabby. What you choose to do with your dividends is up to you. You can:

• Reinvest them to buy more shares of the company.
• Buy stock in a different company.
• Save the cash.
• Spend the money (use it to pay a bill or buy a pizza to celebrate).

Regardless of whether the company’s stock price goes up or down, you would receive those dividend payments as long as the company continues to disburse them.

The beauty of stocks that pay dividends is that part of your return includes predictable quarterly payments. Not every company offering dividend stocks can maintain a dividend payout in every economic environment — something that the COVID-19 pandemic has demonstrated — but a diversified portfolio of dividend stocks can get you reliably paid, rain or shine.

Combine those dividends with capital appreciation as the companies that you own grow in value, and the total returns can rival and even exceed those of the broader market.