I'm looking for ways to start accumulating passive income and when I read online, many sources are saying to purchase dividend stocks. I never understood this: most dividend stocks pay a dividend of about 1-8%/year. However, in a year, it could be very, very likely that the company's stock drops more than 1-8% in the year. (Ex: high dividend stocks like ATT and Exxon dropped 20 and 38 percent past year). Sure if the dividend stock goes up (aapl, msft), you make money but at that point, we're just investing in the market. And a crash can happen anytime. And if the stock goes down, that apy for dividend would also go down? Am I missing something? How can dividend stocks be treated as passive income when no one really knows what's going to happen to the stock (goes up or down)? #personalfinance #investments #dividendfinance #stocks
Here's the rationale. There's a certain league of companies that have been paying (and increasing) their dividend for 25 or 50+ years. They are usually referred to as dividend aristocrats or dividend kings or something like that. Obviously for a company to achieve such a feat. Through half a decade and through several recessions, is an indication of financial strength and ability to produce reliable cash flow. They are generally perceived as being safe. They are not immune to market volatility though. Nothing is. So while COVID-19 may have slashed their stock prices by half, they still continue to produce income to their owners. Think of it like owning a rental property. If its market price drops temporarily, yet it's still generating rental revenue, the owner will probably be fine. Now contrast that to a young company that is growing. They probably don't generate that much cash flow, and if they did, they would probably invest it to grow the business rather than pay their shareholders. There's definitely higher risk, and non-existent income (dividend). But it may grow by 50-100% in one year. Think TSLA for example. Investing is not a one-size-fits-all. If you're young and don't need to live off your portfolio's income, you probably want more growth stocks than mature dividend stocks. Disclaimer: This is not investing advice. Consult your financial planner.
Throw it in MO and get the money.
What is MO?
If you really want dividends, don't look at yield but instead look at companies growing their dividend. ("dividend growth strategy" you may Google the term) There are ETFs like DGRO and VIG that holds companies who increase their dividend year over year.
I second that. Companies with a very high yield (double digits) often may be a trap. It may be an indication that the stock is risky and that a dividend cut may be coming soon. There is a reason why the stock price went down so much, causing the % yield to increase.
Get PLTR and sell covered calls
The secret is compounding interest. Ideally the stock goes up too. If so, you never have to sell and pay taxes. You are tax protected on gains and can reinvest the dividend yields. Generally this beats any high yield savings account and inflation. You can also outperform other investments like property that requires costs like maintenance.
The time horizon for such investment is long term at least 5+ years. Don't invest if you think these stocks go down long term. Most people hold these in retirement portfolios. Hence it works out.