Dividend investing has gained renewed popularity in recent years. FIRE (Financial Independence, Retire Early) movement and growing interest in passive income are some better known factors that have contributed towards dividend investing’s popularity surge. Many people wonder if a dividend stock can pay for itself. Before investing in a dividend stock, you want to consider this so you can get the best out of your investment.
A dividend stock can really pay for itself, but it takes time, as you won’t earn your entire investment back right away. You’ll need to consider the frequency of your payouts and the yield that they have. Also, dividend investing is generally effective only for long-term investments.
Dividends offer better rewards over time. The longer you hold your dividend stock, the more payments you’ll receive. This also means dividend stocks are best for investors who want to invest for the long-term.
After giving your money time to grow, eventually, you’re likely to earn profits from your capital.
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How Long It Takes for Dividends To Pay for Themselves?
It’s important that you know how long it’ll take for a dividend stock to pay for itself. To achieve handsome dividend income, it is generally a good idea to keep reinvesting dividends that you accumulate over the initial years of holding a dividend stock. After that point, you may stop paying to accumulate more of the dividend stock and start profiting from it.
The two factors that can significantly impact the time it takes for your dividend stocks to grow include:
- The frequency of dividend payouts
- The dividend yield
The higher the frequency and dividend yield, the sooner you can start making a meaningful profit off your dividend stock. Let’s talk about everything you need to know on these factors.
Consider the Frequency of Payouts
You need to consider the frequency of the dividend payouts, which can appear monthly, quarterly, or annually in your accounts. How often they occur will factor into the time it takes for a dividend stock to pay for itself.
Let’s use the $1.00 dividend payment as an example again. Here’s how that amount would split between the frequency of your payouts:
- Monthly payouts: You receive about $0.08 per month.
- Quarterly payouts: You receive $0.25 every four months.
- Yearly payouts: You receive $1.00 every year.
If, for instance, you bought $3.00 worth of stocks, it would take you at least three years to receive that amount back. However, if you reinvest the dividend payments back into the dividend stock, you could recover your investment much earlier. This is because doing that will increase the size of your dividend payments.
That’s why it’s best to keep reinvesting dividend payments into the purchased stocks for compounding effect to take its course. That way, dividends can truly deliver you passive income.
While many people prefer to have more frequent payouts, the company doesn’t technically have to pay dividends at all. So, when you find good stocks that in fact pay frequent dividend payments, make sure to reinvest these payments to keep growing your portfolio.
Of course, it’s best to also hold such stocks for as long as possible.
More often than not, it will be a long time for your dividend stocks to pay for themself purely through dividend payments. Your best chance of expediting this timeline is to invest in stocks with high dividend yield. This brings us to the next consideration to have when investing in dividend stocks – the dividend yield. So, let’s jump right into it!
Consider the Dividend Yield
You’ll also want to think about the dividend yield.
This is a financial ratio that shows how much the company pays in dividends each year relative to stock price. This ratio comes from dividends divided by the stock price.
You’ll want to compare the yield to the amount you spent on the dividend stock. Doing so should give you a rough idea on when the dividend payments should fully pay for your investment and start to turn a profit.
Higher yields are a more efficient way to make a profit quicker if the company can keep up the payments. When a dividend yield seems too good, make sure you look into it first because it could be up due to lower stock prices or other issues.
Overall, consistent yields are the best option for building a reliable source of income. When you receive the payment, you can reinvest it into the stock, obtaining even higher dividends over time.
How To Calculate Dividend Yield?
Even though we briefly covered how you would calculate the dividend yield for a stock in the above section, let us discuss it a bit more for additional clarity. As mentioned above, you calculate dividend yield by dividing the yearly dividend by the share price.
For example, you receive $0.40 per year. Then, divide that by the amount you spent per share. If it was $20 for a claim, you have a dividend yield of 2%. Any dividend yield that falls between 2% and 6% is considered good.
Many experts recommend that you find investment options that fall into that range.
Higher yields often come with a greater level of risk because the company focuses on putting more money into its payouts instead of its growth and other functions. Hence, over time they may not offer the same levels of payments.
Why Hold Dividend Stocks?
Many investors choose to hold their dividend stocks, which works best for the long term since you likely want to recover the amount you paid into the stock. Dividends make it possible to collect gains on your stock without having to trade them.
For this reason, many people find them to be a better option for passive investing.
You earn a steady income over time and don’t have to worry about selling unless you want to. The longer you can hold, the better, and soon, you’ll notice the stock paying for itself.
If you plan to sell, you should make sure you at least keep the stock until after the ex-dividend date. That way, you receive the dividends you paid for.
Benefits of Dividend Stocks
Dividend stocks come with several benefits that include making it possible for you to earn an income during volatile market periods. The dividends also act as a hedge against inflation and come with some tax benefits.
Many investors feel that high-yield dividends are well worth the investment, as you receive payments consistently at certain times. Plus, you can set the dividends to automatically reinvest in the stock, helping it make you money with each release of dividends.
In short, you’ll want to consider adding some dividend stocks into your portfolio. This YouTube video covers all of the pros and cons associated with this investment type:
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Conclusion
Overall, dividend stocks do pay for themselves, but you need to keep a hold of them for a set amount of time. The longer you hold onto the dividend, the more you can earn back in profit.
Plus, you’ll also need to make sure you consider the dividend yield.
In short, there are many investment strategies you can take with your portfolio. Dividend stocks are one of the best options out there for fighting inflation and diversifying your investments. When you use them correctly, they’re the perfect way to earn a passive income.
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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