Pro
- Passive Income
When you buy dividend stocks you are actually setting yourself up for extremely passive income. You will get a payment every 3 months usually just fir buying and holding the stock.
2. Compound interest
Dividend paying stocks have a great way to building income two different ways. You get a payout from holding a dividend paying stock and if you reinvest your payout you create a bigger paying stock as time goes on.
3. Dividends Can Be Diversified With ETF’s And Mutual Funds
The awesome thing about dividend stocks is that you can get paid regularly with out having to buy individual stocks. So this risk factors get be mitigated by not owning just one stock.
4. Tax Advantages Of Dividend Paying Stocks
Dividends paid by companies can either be classified as income or capital gains. According to the IRS, “Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.”
The difference between the two rates can be a lot. If your regular income puts you in the top U.S. tax bracket, you pay 37 percent — more than a third — to Uncle Sam. On the other hand, if you own companies that pay qualified dividends your top tax rate on that money is only 20 percent. Especially if you are reinvesting that money into buying more stock, the difference in returns over ten years can be enormous.
You can do research to see what companies pay qualified dividends and which don’t. The rules according to the IRS are:
- The dividend must have been paid by a U.S. company or a qualifying foreign company.
- The dividends are not listed with the IRS as those that do not qualify.
- The required dividend holding period has been met.
As with most stock investing, the easy way to guarantee your dividend stocks pay qualified dividends is to buy them in bulk in an ETF or mutual fund. (Vanguard has a list of its qualified dividend ETFs here.)
Even if you don’t own companies that pay qualified dividends, if you own those companies in a Roth IRA or Roth 401(k), the dividends income grows tax-free. And if you are thinking about a Roth conversion for your traditional IRA or 401(k),
5. Inflation Actually Helps
When inflation hits it actually makes the Dividend stock perform better because most of the industries that are dividend paying stocks make more money during inflation.
Cons Of Dividend paying stocks.
- Dividends Can Stop At Anytime. A company can slash dividends or all out stop paying dividends without notice. They usually will write a letter to the stock holders to inform them of the slash or stop payments of the dividend. This can really effect your income.
- Individual Stocks Are Risky. Most people think that dividend stocks are not risky because they’ve been around for so long but in reality they are just as risky as a non dividend paying stock.
- You Have To Invest A lot To Make REAL Money. Dividend stocks only pay small amount out every three months. So to get a substantial amount of money back you gotta put up a lot. It won’t have to be all at once but you can do it over time.
So there you have it those are the pros and cons of dividend paying stocks. The pros out weight the cons and can really make some passive income if your consistent in my opinion.