Viral.D
New member
Understanding the amount of investment risk you have, and being okay with that level of risk are of primary importance so I’ll address this first.
As a refresher, investors get dividends when a company pays out their earnings to their shareholders instead of investing that money back into the company. Newer, faster growing companies will retain their earnings so they can use the money to expand.
This naturally means that a company that pays dividends has been through the major growth phase and gotten to the point where they can pay out at least some of their earnings to their shareholders. Given this, there is an element of safety with dividend stocks vs newer, higher growth stocks. With high growth stock, investors come to expect that level of growth to be sustained and if it is not, the company’s stock prices can drop like a hot potato.
But the other risk to consider is not whether a single company has reached the point of stability. It is the fact that the overall market goes through bear markets periodically.
Dividend stocks fall right along with the overall stock market. The good news is that dividend stocks, as a whole, generally don’t fall as much as the broad (entire) market.
One reason for this is that investors hold stocks for two major reasons: growth or income. With investors who are invested in stocks for income, the dividends are almost always still paid, even when the value of the stock drops.
This means that income investors have much less reason to sell their stocks (or funds) than someone who has invested in the stock market for growth. If a retiree is paying the bills with dividend income, then they’ll certainly need to hold on to those stocks.
When investors have a good reason to hang onto their stocks, like income investors do, the resistance to sell provides a little bit of a cushion during the occasional bear stock market. This cushion means that dividend stocks typically don’t fall quite as much as growth stocks that don’t pay a dividend.
As a refresher, investors get dividends when a company pays out their earnings to their shareholders instead of investing that money back into the company. Newer, faster growing companies will retain their earnings so they can use the money to expand.
This naturally means that a company that pays dividends has been through the major growth phase and gotten to the point where they can pay out at least some of their earnings to their shareholders. Given this, there is an element of safety with dividend stocks vs newer, higher growth stocks. With high growth stock, investors come to expect that level of growth to be sustained and if it is not, the company’s stock prices can drop like a hot potato.
But the other risk to consider is not whether a single company has reached the point of stability. It is the fact that the overall market goes through bear markets periodically.
Dividend stocks fall right along with the overall stock market. The good news is that dividend stocks, as a whole, generally don’t fall as much as the broad (entire) market.
One reason for this is that investors hold stocks for two major reasons: growth or income. With investors who are invested in stocks for income, the dividends are almost always still paid, even when the value of the stock drops.
This means that income investors have much less reason to sell their stocks (or funds) than someone who has invested in the stock market for growth. If a retiree is paying the bills with dividend income, then they’ll certainly need to hold on to those stocks.
When investors have a good reason to hang onto their stocks, like income investors do, the resistance to sell provides a little bit of a cushion during the occasional bear stock market. This cushion means that dividend stocks typically don’t fall quite as much as growth stocks that don’t pay a dividend.
