Dividend Stocks have Risks
Dividend stocks are a great method for creating a passive income. They are the perfect example of making your money work for you. You invest in a company and they pay you a passive income just because you own shares of their company. While some of these companies pay a decent dividend, make sure the stock is not going down hill faster than the dividend pays out, otherwise the high dividend is not worth the purchase.
What Are Dividend Stocks?
Dividend stocks were first mentioned in the stock metric post. These are not necessarily a specific genre as much as dividend is a key metric in a stock. As I said in the other post, if a stock does not distribute a dividend, it is not a bad thing. A quick explanation of a dividend is a bonus a company gives an investor for owning shares of their stock. This is the passive income from your investments. Many of the large companies give dividends of less than 1% per year. That being said, dividends don’t equate to much per share. For example, Apple pays $0.22 per share per quarter. This means that every quarter, if you owned 100 shares, you would get $22. Not great right, given the stock price is $145.58 and 100 shares would cost you $14,558. However, this is a side bonus that goes along with the expected appreciation of the stock. A side income to accompany the buy low, sell high mentality.
As I said, many companies do not distribute dividends, and that doesn’t mean they’re bad companies. It means they’re taking that money and reinvesting it in someway that will benefit the company.
Dividend Stocks Focused on Dividends
There are companies on the market that focus their value around dividends. These companies pay out their dividends in either quarterly or monthly distributions. Many of these are Index Funds. These funds create a portfolio of high dividend yielding companies or perform strategies that allow dividend distributions to their investors on a regular basis. Some of these pay over 1% per month. For example, SPHD follows the high dividend paying stocks in the S&P 500. It pays a monthly distribution of $0.11 per month. At $44 a share, that equates to 0.25% per month, or 3% per year. The dividend alone is a better investment than a savings account. This is easily traded on Robinhood.
In addition to these index funds, there are also Real Estate Investment Trusts (REIT) that pay a much higher dividend. Let’s dive into these.
Real Estate Investment Trusts
A Real Estate Investment Trust (REIT) is a company that owns a portfolio of income producing properties in numerous economic sectors. There are REITs in residential real estate, commercial real estate, even hospital and medical real estate. These companies meet the numerous requirements to qualify as REIT, and majority trade on stock exchanges. They give investors access to real estate and the passive income associated without having to shell out thousands for their own investment property.
How do REITs Make Money
Most REIT income is straightforward. They lease properties to people or businesses and the net income is distributed to the investors. The taxable income is typically paid out completely to the shareholders to minimize tax burden on the company and pass the liability down to the shareholders who pay tax on the dividends.
Cautionary Views
There is a large cautionary tale to be told for companies with incredibly high dividends. There is one company that has a 15% annual dividend investment. They distribute $0.065 per share per month. This is great at the share cost of $5.13. That’s 1.26% a month! The problem is over the last 3 months the stock has dipped 6.9%. You may have made 3.78% in dividends, but you lost more with the stock depreciation. This happens with many REITs, so research is big. You want to make your money work for you, but make sure it outpaces any depreciation if there is any.
Disclaimer
Once again, I am not a financial advisor. These tips are some things I have validated with my own personal experiences. If you feel you need more personal advice, please consult a professional financial advisor.
