Anyone investing in stocks for the first time is a beginner, but the profiles of two beginners could be worlds apart. A young beginner in their 20s may have $10,000 to start investing, but an aging beginner in their 50s may start with a fund of $200,000. Does this mean that dividend stocks are good for beginners, even if two beginners are starting in different places?
Dividend stocks are relatively safe for beginners, irrespective of experience and age. Older investors typically have more capital and lower risk appetite, so they prefer dividend stocks to generate consistent returns. Contrarily, for young investors with limited funds, investing in riskier growth stocks is usually the better option.
All financial instruments are designed to serve distinct purposes. Money market funds empower beginners with limited capital to leverage the power of the collective investment of a group of investors while dividend stocks primarily provide a low yield but stable passive income on investment. Read on to learn more.
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Table of Contents
Why Beginners Should Consider Dividend Stocks?
Every beginner is bound by their initial capital, immediate to short-term financial objectives, risk appetite, and desired return on investment. These four fundamentals determine the scope and appropriate options in the intended investment portfolio.
Let’s talk more about the reasons why you may want to invest in dividend stocks as a beginner.
You Have a Large Capital
Some beginners may have significant capital to start, which might be a major portion of their life savings. Many people capitalize their 401(k) to secure a substantial passive income post-retirement.
Any beginner who has a significant fund, almost or over $200,000, should consider buying dividend stocks.
Few companies issue dividends worth around 9% to 10%, while a dividend stock’s average yield is in the range of 2% to 5%. The annual return is unfavorably low for a small investment to generate sufficient income.
This approach can be rewarding if you can park a 6-figure amount in multiple dividend stocks and have more funds to spare on other instruments.
You Have a Holding Capacity or Long-Term Exit Plan
Beginners with a holding capacity of 5 to 10 years can consider dividend stocks.
Blue-chip companies, especially those with a large market cap, are unlikely to grow as fast as a startup or to the potential extent. However, large corporations record annual compounded growth, which can be significant in 5 to 10 years.
A sustained holding capacity enables beginners to earn an annual dividend each year and offer a handsome return on investment at the time of exit. Dividend stocks generally record modest growth, so a beginner has to choose among those few that have potential.
Beginners with a short-term exit plan shouldn’t consider dividend stocks.
A dividend stock is unlikely to undergo a double-digit appreciation unless the company is betting big on expansion or diversification. New opportunities in the same sector may also lead to a generous appreciation of the share price.
Except for rare plummets, dividend stocks are largely stable, so a beginner must have a long-term exit plan. Those looking at post-retirement income from dividend stocks usually don’t plan to exit anytime soon.
The objective is to sustain the low yield but assured return and not to sell the stock.
You Want To Invest in Business Expansion & Diversification
If a blue-chip company plans to expand its business in a new territory or diversify into more industries, its dividend stock is poised for appreciation.
Such dividend stocks can be both risk-averse and financially rewarding.
Beginners should look for opportunities among dividend stocks that haven’t been widely tapped into by veteran investors. Awareness of the market and analyses are the key in this regard. Since beginners have a fresh slate, they can craft their strategy prioritizing their preferences and expectations.
You Want To Receive an Assured Passive Income
There are 2 types of companies that have been paying increasing dividends for many decades. These public companies are classified as dividend kings and dividend aristocrats.
Their sustained legacy of paying dividends every year and increasing the yield assured passive income in due course.
Both dividend kings and dividend aristocrats are royalties in the stock market. Everyone knows about them. Anyone interested in dividend stocks probably already possesses many shares and is perhaps looking for more.
Beginners may not find a substantial stock of such shares readily available.
Why Dividend Stocks May Not Suit Beginners?
Dividend stocks can’t sustain the livelihood of a beginner.
Someone with an investment of a million can earn tens of thousands as dividends every year, but such a return is impossible with smaller funds. Beginners need other revenue sources, such as salary, pension, or social security, to supplement the passive income of dividends to sustain their livelihood.
Let’s now look at the reasons why you may not want to invest in dividend stocks as a beginner.
You’re Only Looking for High Returns
Beginners, especially young adult investors, look for high returns.
Growth stocks are better than dividend stocks for this specific goal. A combination of growth stocks, bonds, and a small investment in dividend stocks may be a suitable option.
Investors, beginners or veterans, aiming for high returns prioritize growth stocks, money market funds or bonds paying a sufficient interest, and other investment options. Some money market instruments include dividend stocks.
Beginners must assess these probabilities before choosing any fund, bond, or equity.
You Have Short-Term Exit Plans
Beginners with short-term exit plans of a year or less shouldn’t consider dividend stocks.
All dividend stocks have a date of record and ex-dividend date. If a stock isn’t purchased before the ex-dividend date, those shares aren’t eligible for the current fiscal yield. The date of the record follows the ex-dividend rate.
Dividend stocks aren’t suitable for short-term exit plans.
Beginners can have swift exits with growth stocks depending on the cashable return on investment. Stable and more predictable dividend stocks can complement such high-risk bets.
You Don’t Want To Be Taxed for Every Capital Gain
Beginners with a reasonably high salary should weigh the tax implications of dividend stocks. All dividends are treated as income, so an investor will pay tax on that income per the applicable bracket.
In contrast, any return on investment through the sale of stocks is treated as a capital gain. Long-term capital gain, which is beyond 12 months from the date of acquisition of such stock, has a lower tax rate than those in the higher tax brackets.
The tax implications are also a reason why older investors prefer dividend stocks.
As their regular income reduces or is no longer available, the tax bracket is irrelevant. Dividends, like all other incomes, have thresholds till which they aren’t taxed.
Dividend Stocks Are Good for Aging Beginners
Aging investors are generally risk-averse for 2 reasons.
- They want to protect their capital or savings and earn a modest but steady passive income.
- They have less time to recover lost money, so volatile growth stocks aren’t ideal for their portfolio.
Younger investors can take more risks, as they have years or decades of employment, self-employment, or entrepreneurship ahead of them. Their primary objective is to build and grow an investment portfolio, not secure a passive income for retirement.
Such goals emerge beyond the age of 45 or 50.
However, younger beginners must seriously consider dividend stocks if they plan to be in the game for the long haul. Holding a stock for 20 to 30 years can yield a significant return, even if the dividend stock undergoes little annual appreciation.
The eventual return through the sale of such a stock supplements the annual dividends earned over the years or decades.
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Conclusion
All major financial instruments have their advantages and shortcomings. While growth stocks are high-risk, bonds have fixed interests as returns. Eventually, the financial capacity, objectives, and priorities of beginners should determine the preferred investments.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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