When investing in stocks, you want to make sure you’re always making wise decisions with your money. Many people consider dividend stocks to be a good option since they earn a reliable source of income over time. However, do dividend stocks actually increase in value?
Dividend stocks don’t typically increase much in value. They have a set price when you buy them, which rises when the company announces dividends availability. The scramble to get in on the yield raises demand for the stock. When the ex-dividend date arrives, the stock value adjusts accordingly.
So, while this type of stock price doesn’t increase, you still receive funds over time from the dividends. Overall, dividend stock is advantageous to have in your portfolio! If you want to learn more about dividend investing and decide whether it makes sense for you, make sure to check out the rest of the article as we unfold this subject in detail.
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Table of Contents
What Are Dividend Stocks?
When researching investment options, dividend stock is one of the more popular options you’ll encounter, as plenty of investors use them. However, you may want to familiarize yourself with this financial option more.
Dividends come from companies as a way to reward shareholders for investing with them. Dividend stock most often arrives from established companies who strive to offer more profit each year to their investors. They may pay monthly, quarterly, or yearly.
Many people use dividend stocks to add to their income and resist the impacts of inflation. Overall, it’s a good idea to have some of these stocks in your portfolio, as they’re less risky than growth stocks.
You can use the dividends or reinvest the funds into your shares.
Dividend Yield
The dividend yield is the annual, monthly, or quarterly payment you receive. The output should be a percentage of the stock price, which can vary per company or even per stock.
If a company offers a dollar in dividends and you pay $20 per share, the dividend yield would work out to be 5%. The higher yield you can get, the better. Many companies also make sure to increase their dividend yield over time since it makes them the more favorable option for investors on the market.
A stock’s dividend yield can also fluctuate depending on the company. The yield might be permanent, but you should notice patterns over time.
It’s best to find options that can help you increase your income reliably.
Dividends and Stock Prices
Dividend stocks technically don’t change after you receive them, as their value usually stays the same. However, it may appear as though their prices fluctuate a lot.
After a company declares a stock dividend, the price of the stock often shoots up, so you’ll need to remember this when you want to buy or sell your stocks.
This situation occurs due to demand because more investors want to get that dividend yield into their portfolios. When the stock dividend increases and the value stays the same, the book price of a common share does go down.
However, you probably shouldn’t worry when you see the price of your dividend stock drop on the market. You still receive the dividend you signed up for, as long as you did so before the ex-dividend date. That means you still make an income off of the dividend stock that you have.
Some new investors panic when they notice the stock fluctuating because they believe it to be similar to other investments.
Can Dividend Stocks Rise in Value?
When it comes to most types of stocks, investors observe the trends carefully. That way, they can pick up on market trends and sell when they know they’ll make a high profit. However, with dividend stocks, most people hold onto them for the long term.
Dividend stocks usually don’t rise in value much. The price may seem like it’s fluctuating, but that’s to adjust for the dividend amount. When you factor that in, it’s not changing as much as you might expect. Most people hold these stocks for years to get the most from the dividend payments.
Dividends are a way to increase your income over time. You can add the payments back into the stock you have, making it worth more, leading to better dividend payments in the future. Over time, you could have significant dividend yields in your portfolio.
Dividend Capture Strategy
Due to the nature of dividend stock and the ex-dividend date, many day traders and investors use this as an opportunity to make a higher profit. If you were also to use this strategy, you could earn more funds, making the stock value more worthwhile.
In the dividend capture strategy, an investor buys dividend stock before the ex-dividend date occurs.
In doing so, they ensure they receive the dividend yield. Then, the investor sells the stock right after the ex-dividend date. If you time it right, you accept the dividend and a good profit from the sale.
However, you’ll need to monitor the market to pull off this strategy.
The dividend stock’s value often drops after the dividend announcement since the short term traders strive to book profits while the company tries to make its stock more appealing for new investors to buy. You may want to wait until the stock value returns to its average level to make the sale so you don’t lose any money.
Investopedia discusses the dividend capture strategy in great detail on their site. (Link in article sources below)
They explain how the primary goal of the trade is to get the dividend, then make the sale. This strategy isn’t an option for anyone who wants a long-term investment for passive income.
Why Dividend Stocks Are a Good Option?
Purchasing dividend stocks is an excellent option for many, despite the fact that their value does not increase much over time.
Once you buy the stock, you’re sure to receive the promised dividend yield, whether the company’s available stock price goes up or down. Many people find more peace of mind from these types of stock.
You’ll notice the stock price increases when dividends first come out because they’re in demand. However, that value drops when the ex-dividend date arrives. Companies and shareholders push against this, so investors don’t sell immediately after receiving their dividends.
Even with this effect in place, dividend stocks are a great option to have in any portfolio.
The dividends usually mean that a company is doing well since they couldn’t offer them otherwise. Plus, you can choose to reinvest the funds into more stock in the company, which is a passive way to increase your income.
This short YouTube video breaks down what dividends are, letting you decide if they’re for you:
Learning More About Dividends
If you’re still unsure about dividend stocks and how to use them, you’ll want to conduct some more research on your own. I recommend reading the Dividend Growth Machine: How to Supercharge Your Investment Returns with Dividend Stocks by Nathan Winklepleck from Amazon.com.
The author details ways to improve your returns, all while taking less financial risk. It also offers excellent investment strategies for you to use.
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Conclusion
Today, many companies offer dividend stocks, so you’ll find plenty of options on the market. You’ll also need to buy the shares in advance before the ex-dividend date. Otherwise, you won’t receive the dividend payments.
There are strategies that traders use to get the dividend, then immediately sell the stock for a profit.
However, most people feel more comfortable with holding on to the stock for a more extended period. This strategy allows investors to make a passive income off the dividends, increasing value over time. Reinvesting in the stock raises your dividend yield, creating an upwards cycle.
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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