If you have some extra cash on your hands, it would be a shame not to put it to good use. An old solution would be to put it into a savings account or buying real estate, but a new trend of dividend investing has become a more popular alternative in recent years. Plus, many finance experts consider dividend investing to be much better than putting money in savings accounts. But, why is it better than a savings account?
The 10 reasons dividend investing is better than a savings account include:
- Dividend investing creates regular income.
- Dividend investing offers higher yield than a savings account.
- With dividend investing, you can reinvest your earnings.
- Dividend investing offsets the effects of inflation.
- With dividend investing, there is a better growth potential.
- Dividend investing is great for retirement.
- Dividends can grow faster.
- Dividend investing offers certain tax advantages.
- Dividend investing is not too risky.
- Dividend investing performs much better long-term.
Let’s go into more detail about all the benefits that dividend investing provides over a savings account so that you have an easier time choosing where you will invest your money.
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Table of Contents
10 Things That Give Dividend Investing an Edge Over Savings Account
Described below are the top 10 reasons that make dividend investing more suitable over savings account:
Dividend Investing Creates Regular Income
Most savings accounts earn you interest at the end of each year. So, if you invest $1,000, you will make $1,010 at the end of the year with a 1% APY (annual percentage yield). However, if you want your interest and money to compound over the long term, you can’t take the money you’ve earned from the account.
On the other hand, most reliable companies that pay out dividends do so quarterly.
Other companies do so monthly, semi-annually, or annually. The income you receive from dividends is fixed and is automatically issued to your brokerage account each time the company pays out dividends to its shareholders.
Dividend Investing Offers Higher Yield Than a Savings Account
Not only do dividend stocks pay you regularly, if you invest in the right companies, but they also do it with a much higher yield than a savings account.
The average interest rate for savings accounts in the US for 2021 is only 0.06%. While some banks will give you a 2-3% interest rate, this is still lower than most dividend yields, which usually range between 3% and 5%, depending on the industry.
With Dividend Investing, You Can Reinvest Your Earnings
You can use the amount from dividends to directly reinvest in the company by buying more shares. Most companies offer their investors the option to reinvest all of their dividends back into the company directly.
Over time, as you keep reinvesting into the company, you will find that your portfolio has grown significantly, especially if the company continues to increase the dividend amount.
Dividend Investing Offsets the Effects of Inflation
People’s most significant concern with saving accounts is that the inflation rate is usually higher than the interest you earn, which means you are losing money if it’s sitting in a savings account.
Since dividend stocks trade on the stock market, inflation is adjusted for, and most companies will increase the dividend amount to adjust for inflation. Additionally, your initial investment will be worth more over the years.
For example, a $1,000 investment in 1980 was a lot more than a $1,000 investment today.
With Dividend Investing, There Is a Better Growth Potential
Dividend payouts and compounded interest from the reinvested payouts are not the only way dividend investing can earn you money.
Keep in mind that to earn dividends, you need to own shares of a company that pays dividends to its shareholders. And, just like with any company on the stock market, the share price of a dividend-paying company can also change.
If the share price increases significantly, you can sell some or all of your shares in the company to make a profit on your initial investment.
On the other hand, even if the share price drops, that rarely affects the dividend amount.
Dividend Investing Is Great for Retirement
Dividend investing is so safe that some people even use it as a retirement account that they continually put their savings into. In fact, dividends are the go-to stock option for many investors looking for a comfortable retirement.
With a bit of planning, the cash flow generated from dividends can supplement or completely replace the income you receive from social security and pension.
When selecting dividend stocks for retirement, it is essential to diversify your portfolio with multiple dividend-paying stocks with decent dividend growth potential. You can determine the dividend growth potential by seeing how a company has distributed dividends in the past and whether the dividend amount has increased consistently over the years.
Dividends Can Grow Faster
As companies increase their profits consistently, they can reward their shareholders with higher dividends each year. Some companies have increased their dividends continually for over 50 years.
Those that have done so for at least 25 years are called dividend aristocrats.
So, not only does dividend investing offer a consistent passive income, but you can also expect the income you earn from dividends to increase over the years. Increasing dividends is a common practice among large companies to attract heavier interest from investors, by showing them that the company can sustain growth and profitability.
Dividend Investing Offers Certain Tax Advantages
The amount you earn from a savings account is taxed as a taxable income. Dividend stocks are also taxed, but there are two advantages that they offer in that regard. Let’s talk about them now.
You Can Lower Taxes by Investing in Qualified Dividends
Qualified dividends are those issued by any US or foreign company that trades on one of the major US exchanges. You also need to hold it for more than 60 days for it to be considered a qualified dividend.
These dividends will reduce your taxed amount by more than twice. So, if you are in the 35% tax bracket, your earnings from a qualified dividend will only be taxed 15%.
There Are Non-Taxable Dividends
You can also invest in non-taxable dividends, which are paid out by a mutual fund or an investment company exempt from taxes. These funds or companies don’t pay taxes because they invest in tax-exempt securities like municipal bonds.
Municipal bonds are securities issued by states, cities, or counties to fund daily operations and projects.
The bonds can either mature in a year or more than ten years, and you will usually pay interest semi-annually. They are exempt from federal tax, while some are also exempt from state and local tax.
Dividend Investing Is Not Too Risky
Investing can earn you a lot more than keeping your money in a savings account. However, one issue that many people have with investing is that it is a lot riskier.
Dividend stocks allow you to invest your money while also keeping them in safe hands, such as the multi-billion dollar companies that have grown consistently over the years.
With that said, not all companies that pay out dividends are guaranteed to keep growing or maintain their level of success forever. It is imperative to invest in reliable companies that have shown steady growth for an extended period, preferably decades.
Dividend Investing Performs Much Better Long-Term
If you have a certain amount of money that you don’t need right now or in the near future, it is better to let it sit in a dividend investing portfolio than a simple savings account.
Over a more extended period, let’s say ten years, inflation will affect the value of your savings account so significantly that even the compounding interest you earn won’t be enough to make up for it.
On the other hand, if you leave your dividend shares for a long period, you will find that the value of those shares has increased. You will end up owning more of them if you reinvest your dividends, and the dividends themselves will usually increase each year steadily. In the end, your portfolio will look a lot better than it did when you started ten years ago.
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