Why (& When) to Consider Dividend Stocks in Your Portfolio (2024)

FAQs

Should you have dividend stocks in your portfolio? ›

Yes, there are a lot of advantages. However, there's also a price to pay for those benefits. The most obvious advantage of dividend investing is that it gives investors extra income to use as they wish. This income can boost returns by being reinvested or withdrawn and used immediately.

No matter what stage of life you're in, dividend-paying stocks can be a great way to supplement your income and improve your portfolio's growth potential. Just be sure you research the companies' overall financial health, not just their dividend rates, before investing.

Now, there's no fixed amount of money you need to invest for dividends. It all depends on the yield of your investments, so understanding “yield” is pretty essential to understanding dividend investing. (Note that the definition below is how “yield” applies to stock dividends.

There is no hard and fast rule for how many dividend stocks to start a portfolio, but a good starting point is to aim for a minimum of 10. This will give you a good mix of different companies and sectors and help to diversify your risk.

You can divide $68,000 by an estimated dividend yield to calculate a targeted portfolio size. So, if you're earning 2% in dividend yields, you'd divide $68,000 by 2%. The answer, $3.4 million, is the size of the portfolio needed to produce your income target.

To achieve $1000/month in dividends, you'll need a portfolio generating about $12000 annually with a 3% average yield. Build a diverse portfolio, increase contributions over time, and utilize dividend reinvestment plans for compounding growth.

How can I make $1000 a month in passive income? ›

Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.

“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.

There are two reasons to invest in stocks that pay dividends. One is to improve the portfolio's total returns, accomplished by reinvesting their payouts. The other is to generate retirement income. Rather than reinvest dividends, retirees could spend them.

Dividend-paying stocks, on average, tend to be less volatile than non-dividend-paying stocks. A dividend stream, especially when reinvested to take advantage of the power of compounding, can help build wealth over time. However, dividends do have a cost.

Monthly dividend payers are especially important to retirees and others who are on a fixed budget or use their stock holdings as a source of income. Low commission rates start at $0 for U.S. listed stocks & ETFs*. Margin loan rates from 5.83% to 6.83%.