What are the disadvantages of dividend stocks?
The Risks to Dividends
Cons. Bonus shares dilute the share price. Stock dividends may signal the company's financial instability. Share dividends may be less attractive to some investors than cash dividends.
Dividend investing can be a great investment strategy. Dividend stocks have historically outperformed the S&P 500 with less volatility. That's because dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price. This total return can add up over time.
Dividends paid out as stock instead of cash can dilute earnings, which can also have a negative impact on share prices in the short term.
Stocks that pay dividends are shares of companies that make money. That means they have a steady profit they share with shareholders and they're probably not going out of business any time soon. This makes them a somewhat safer, less risky, option for retirees.
It's prudent to focus on long-run total return, rather than income only. Dividends -- either reinvested or taken in cash -- lead to a higher tax bill. Dividend-paying stocks carry unsystematic risk, which could otherwise be diversified away.
“One mistake to avoid,” Cabacungan says, “is to buy a company's stock simply because it issues a high dividend.” If the company has leveraged excessive debt to fund the dividend, it could come at the expense of future profitability and hurt growth prospects.
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
| Stock | Market Capitalization | 12-month Trailing Dividend Yield |
|---|---|---|
| Gladstone Investment Corp. (GAIN) | $500 million | 6.9% |
| Modiv Industrial Inc. (MDV) | $112 million | 7.7% |
| LTC Properties Inc. (LTC) | $1.3 billion | 7.2% |
| Realty Income Corp. (O) | $44 billion | 6.4% |
The ex-dividend date is the first day the stock trades without its dividend, thus ex-dividend. If you want to get the dividend payment, you need to own the stock by this day. That means you have to buy before the end of the day before the ex-dividend date to get the next dividend. In other words, it's the cut-off date.
How many dividend stocks should I own?
Whether you want to live off dividends today or are investing for the long haul, the best way to build a dividend portfolio for steady income is to follow a simple set of risk management principles: Hold between 20 and 60 stocks to reduce company-specific risk. Roughly equal-weight each position.
Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.
| Name | Dividend Yield | Dividend Rating |
|---|---|---|
| Arrow Financial (NasdaqGS:AROW) | 4.97% | ★★★★★★ |
| Bank of Marin Bancorp (NasdaqCM:BMRC) | 6.67% | ★★★★★★ |
| Evans Bancorp (NYSEAM:EVBN) | 5.08% | ★★★★★★ |
| CVB Financial (NasdaqGS:CVBF) | 5.05% | ★★★★★★ |
Stocks in the S&P 500 index currently yield about 1.5% on aggregate. That means, if you have $1 million invested in a mutual fund or exchange-traded fund that tracks the index, you could expect annual dividend income of about $15,000.
Just like Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), and The Proctor and Gamble Company (NYSE:PG), Verizon Communications Inc. (NYSE:VZ) is one of the best retirement stocks to buy according to the media.
| COMPANY | SECTOR | MARKET CAP |
|---|---|---|
| Prospect Capital (PSEC) | Financial services | $ 2.6 billion |
| Paramount Resources (POU.TO) | Energy | $3.1 billion |
| Gladstone Investment (GAIN) | Financial services | $439 million |
| LTC Properties (LTC) | Real estate | $ 1.3 billion |
If a company whose stock you own is losing money but still paying a dividend, it may be time to sell. "Dividend payers in financial straits may try to stave off a dividend cut—which can drive away shareholders—by funding payouts with borrowed funds or dwindling cash reserves," Steve says.
And while dividend payers enjoy relatively favorable tax treatment currently, such stocks and funds are arguably a better fit for tax-sheltered rather than taxable accounts. The key reason is control. Dividend income, like bond income, isn't discretionary.
In reality, dividends are not “free money.” Dividends are an inflexible, tax-inefficient way to receive investment income while reducing the diversification in a portfolio. Focus less on passive income (dividends) and more on passive wealth (capital gains + dividends).
Companies that offer dividends provide investors with a regular income as the stock price moves up and down in the market. Companies that don't offer dividends are typically reinvesting revenues into the growth of the company itself, which can eventually lead to greater increases in share price and value for investors.
Should I focus on dividends or growth?
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
Dividend Yield
Apple's annual dividend in 2021 was $0.88 ($0.22 paid quarterly). Based on Apple's stock price as of March 1, 2022 of around $163 per share, the dividend yield is approximately 0.50%.
In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments. How Can You Make $1,000 Per Month In Dividends?
And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year. By then, there could be other dividend-focused ETFs to choose from.
Let's consider an investment in dividend stocks for $3,000 a month. If the average dividend yield of your portfolio is 4%, you'd need a substantial investment to generate $3,000 per month. To be precise, you'd need an investment of $900,000.
