WiserAdvisor – Blog

Main Menu

  • Main
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Investment Management
  • More
    • Personal Finance
    • Estate Planning
logo
I Want to Take Charge.
HELP ME FIND AND COMPARE TOP VETTED FINANCIAL ADVISORS IN MY AREA.

FINRA/SEC Registered Advisors

  Your Information is Safe and Secure

WiserAdvisor – Blog

  • Main
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Investment Management
  • More
    • Personal Finance
    • Estate Planning
Investment Management
Home›Investment Management›Why Are Dividend-Paying Schemes Better Investment Options?

Why Are Dividend-Paying Schemes Better Investment Options?

By WiserAdvisor Insights
December 25, 2019
1512
0
Dividend-Paying-scheme

Investing in different instruments for growing one’s wealth or for the intent of building a passive income, has become an integral part of financial planning. However, efficient money management is as important as investing itself. Choosing the right investment option at the right time is the need of the hour, but so is using the returns optimally and smartly.

With a wide range of options to choose from, an investor today can be overwhelmed with choices. The basic question that has bothered the investor community since time immemorial is whether to choose a dividend-paying option or a growth-focused one. However, making the right pick is not that difficult. 

One’s investment objective should be the key factor while making the right decision. Experts suggest that the dividend-paying option can be a more viable option for people who intend to reap regular income from their investments or for people who are nearing retirement, as it ensures a regular income flow. While people who have a greater time horizon at their disposal and have a higher risk appetite can opt for growth-oriented schemes. 

This article focuses on the former. Here’s what you need to know if you wish to take the route of dividend-paying investments.

What is a Dividend?  

Dividend refers to the reward that the company pays to its investors for investing in it. It is generally paid in cash and is given out of the company’s earnings. Stocks, mutual funds, bonds, and exchange-traded funds (ETF) are a few financial instruments that pay a dividend.

How are Dividend-Paying Options Helpful to an Investor?

Post the 2008-09 financial crisis, most traditional or regular sources of income such as government and corporate bonds seemed to have lost their shine in the eyes of the investors. But it was dividend that held its fort even during the turbulence. This is because dividends are a real earning for an investor and even creative accounting techniques cannot manipulate the same. For years many people have overlooked the significant impact of dividends on stock market profits. But research reveals that since 1926 dividend payouts have constituted almost half of the stock investing profits in companies that make up the S&P 500 Index. Here are some important aspects of dividend-paying investments: 

Risk Involved

Investments in stocks, mutual funds or any other financial instruments come with their own set of risks along with inherent market uncertainties. In such a volatile environment, stock prices can fluctuate in a blink of an eye and it doesn’t guarantee an appreciation in the value of the holding. Dividend-paying options go a long way in mitigating the overall portfolio and price fluctuation risk. This is because investing in a dividend-paying stock or scheme helps recover a part of the investment made while waiting for the total invested value to appreciate. It has been observed that during a downturn, dividend-paying options usually suffer significantly less decline in value than the non-dividend-paying ones.

Dependable Returns

An inherent risk of investing is the permanent loss of the invested principal. A longstanding record of paying regular dividends is an effective indicator of the sound financial strength and sustainability quotient of a company. These organizations are generally more mature and stable than others. Furthermore, in times of turbulence, they tend to perform better than speculative ones. Consequently, this also helps in capital preservation. Regular dividend payment history is a key indicator of the company’s strong cash position and regular cash inflow. This, in turn, creates a demand for the stock or the scheme in the market, thereby resulting in an appreciation in the value of the stock or the scheme. 

Another key advantage of investing in a dividend-paying option is that the amount of dividend tends to increase progressively over time, irrespective of the fact whether the stock prices increase or not.  

Overcoming Inflation 

Dividend-paying options also help in hedging inflation as compared to fixed-income investments. These options let investors accumulate income that further increases and retains the purchasing power of the invested principal. A good investment must provide a return that takes into consideration the impact of inflation. For instance, let’s assume that the price of a stock has increased by 4% over the course of a year and during the same period, inflation stood at 5%. Then, owing to inflation, the investor who holds the stock has a net loss of 1%. However, if the same stock had offered a dividend yield of 3.5% during the period, then the investor would have a net gain.

Understanding Taxes 

Dividend incomes are subjected to special tax rates as compared to income from other investment avenues, thereby allowing the dividend holder to retain most of the income received.  In the US, qualified dividends are subjected to tax at a substantially lower rate (between 5% and 15%) than ordinary income. According to the 2011 guidelines of the Internal Revenue Services, individuals with an ordinary income tax rate of 25% or higher are taxed at only 15% on qualified dividends, while for individuals with an ordinary income tax rate below 25%, qualified dividends are completely tax-free.

Reinvestment Options

Dividend-paying options provide investors with a unique opportunity to reinvest the dividend income earned in the scheme or stock again. This is an effective way of growing one’s portfolio and accumulating more shares or stocks. Dividend Reinvestment Plan (DRIP) is one such example of a reinvesting scheme. Reinvesting can greatly boost dividend growth investing returns in the long run while taking advantage of the market conditions.

To Sum it Up

Dividend-paying options have surely some visible advantages over the growth or non-dividend-paying options. But it has its own set of restrictions too. For example, restricted growth or dividend-paying options see less price appreciation compared to the growth stocks, which can attract or dissuade an investor to invest in the option. You must have a clear understanding of your goals before you invest in either of the two. If you wish to know more about investing in dividend-paying investment instruments, consult top financial advisors and get guidance on how to manage your assets more effectively.

TagsGoal-Based InvestingInvestment ManagementPortfolioStocksWealth creation
Previous Article

Potential Conflicts Within the Investment Industry

Next Article

Dealing With Uncertainty While Planning For Retirement

0
Shares
  • 0
  • +
  • 0
  • 0
  • 0
  • 0
WA-icon

WiserAdvisor Insights

A team of dedicated writers, editors and finance specialists sharing their insights, expertise and industry knowledge to help individuals live their best financial life and reach their personal financial goals. We believe that there is no place for fear in anyone's financial future and that each individual should have easy access to credible financial advice.

Related articles More from author

  • How You Can Check Your Portfolio's Risk Level
    Investment Management

    Here’s How You Can Check Your Portfolio’s Risk Level

    May 4, 2020
    By WiserAdvisor Insights
  • Market-Timings
    Investment Management

    The Advantages and Disadvantages of Market Timings

    May 5, 2021
    By WiserAdvisor Insights
  • Risk Tolerance
    Investment Management

    Significance of Correctly Answering Risk Tolerance Questionnaires

    March 24, 2020
    By WiserAdvisor Insights
  • Investing-Roadmap
    Investment Management

    Investing Roadmap for Mid-Career Accumulators

    April 6, 2020
    By WiserAdvisor Insights
  • Portfolio-Strategy
    Investment Management

    Why Do You Need to Have a Portfolio Protection Strategy?

    November 18, 2019
    By WiserAdvisor Insights
  • Retirement-Advisor
    Financial Advisor Guide

    Why Should You Hire a Retirement Advisor?

    August 4, 2021
    By Jonathan Dash

You might be interested

  • Financial Planning

    Financial Planning for Professional Athletes

  • Roth-IRA
    Retirement

    Can You Open a Roth IRA After You Turn 60?

  • Plan-to-save-for-your-child
    Education Planning

    How Do You Plan to Save for Your Child’s College?

Don't miss out! Get our Helpful Financial Tips Newsletter

  • Popular Posts

  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    October 30, 2023
  • Retirement Calculators

    Best Retirement Calculators to plan Retirement

    By WiserAdvisor Insights
    July 26, 2019
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • Retirement-Planning

    Retirement Planning checklist

    By WiserAdvisor Insights
    July 8, 2019
  • Why investing for goals is the right way of investing

    Why Investing for goals is the right way of Investing?

    By WiserAdvisor Insights
    July 16, 2019
  • Portfolio diversification

    5 Dangers of Over-Diversifying your Portfolio

    By WiserAdvisor Insights
    July 26, 2019
  • Financial Planning for couple

    The Complete Guide on Financial Planning for Couples

    By WiserAdvisor Insights
    August 1, 2019

Categories

  • Business Finance (2)
  • Education Planning (29)
  • Estate Planning (22)
  • Financial Advisor (1)
  • Financial Advisor Guide (37)
  • Financial Planning (124)
  • Investment Management (73)
  • Personal Finance (16)
  • Portfolio Management (1)
  • Retirement (30)
  • Retirement Healthcare (1)
  • Retirement Planning (82)
  • Retirement Plans (1)
  • Uncategorized (2)

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

WiserAdvisor is America’s oldest and largest independent network of screened financial advisors. We make it easy and convenient for consumers to find and connect with advisors in their area. We have successfully helped over 100,000+ individuals find their best financial advisor since 1998 with no match fees, no commitments, no obligation, and complete confidentiality. WiserAdvisor has been featured in The Washington Post, The Washington Journal, ABC, CBS, Yahoo and has been seen in numerous other leading financial news and information websites.

Follow Us

  • Recent

  • Popular

  • 4 Reasons Why You Need To Rebalance Your Portfolio

    4 Reasons Why You Need To Rebalance Your Portfolio

    By WiserAdvisor Insights
    December 4, 2023
  • Why do Physicians Need Financial Advisors and How to Find Them

    Why do Physicians Need Financial Advisors and How to Find Them

    By WiserAdvisor Insights
    December 1, 2023
  • The Importance Of Retirement Planning For Senior Citizens

    The Importance of Retirement Planning for Senior Citizens

    By Jonathan Dash
    November 14, 2023
  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    October 30, 2023
  • Retirement Calculators

    Best Retirement Calculators to plan Retirement

    By WiserAdvisor Insights
    July 26, 2019

Contact Us

Corporate Headquarters

12150 Monument Drive, Suite 700
Fairfax, VA, 22033

Business Hours

8:30 AM – 5:00 PM EST (Monday – Friday)

Email Address

wa.assistance@wiseradvisor.com

Phone Number

(703) 651-2060

Fax Number

(703) 259-4487

  • Privacy Policy
  • Terms & Conditions
© Copyright 2023 WiserAdvisor.com. All Rights Reserved.