Should I Invest In Dividend Stocks (and what are they?)

Dividend stocks are any stocks that pay some form of dividend.  However, most investors refer to companies that have a long history of paying out dividends and increasing those dividends over time as “dividend stocks” – Dividend aristocrats is another term used for these companies.

Some examples of dividend stocks are Johnson and Johnson, Proctor and Gamble.

Are solid dividend stocks a good investment?

Sometimes investors pay too much attention to the long history of companies – Bear Stearns (which was not a dividend stock) was a huge success story for many years until it went bankrupt.

It’s tempting to fall in love with the idea of buying a stock and collecting the steadily increasing dividends every year – it seems like free money but in actual fact the company is just giving some of its cash away to its investors.  This leaves the company with less money to grow the business.  This isn’t a bad thing but it’s also not magic money.

Benefits of dividend stocks

The taxation of dividends is less than interest earned on bonds or certificates of deposit so that is one very good reason why dividends are attractive to an investor in a taxable investment account.

Traditionally companies don’t pay meaningful dividends until they are more mature and financially stable.  An investor looking for less risk and a steady income stream would probably be interested in dividend stocks for this reason.

Index funds and mutual funds are also good choices

It’s hard to diversify with individual stocks but you can buy index funds, mutual funds and etfs that specialize in dividend stocks.  These products are a better way for most investors to own dividend stocks rather than buy them directly.  You can also have part of your portfolio in index funds and another portion in dividend stocks if you wish.