Dividend stocks are the Swiss army knives of the stock market. When dividend stocks go up, you make money. When they don't go up — you still make money. That's because these stocks pay out a portion of their earnings to shareholders in the form of dividends. And unlike other types of investments, dividend stocks offer both income and growth potential.
Investing in dividend stocks has become increasingly popular in recent years, as investors look for ways to generate income in a low-interest-rate environment. But there are some important things to consider before jumping in.
First, it's important to understand the rule of 72. This is a quick financial formula that can help investors determine how quickly an investment can double their money. You dividend yield divided into 72 gives you the number of years it will take for your investment to double. For example, if a stock has a dividend yield of 4%, it will take approximately 18 years for your investment to double.
Second, investors should look for companies with a history of paying and increasing their dividends over time. These companies are often referred to as "dividend aristocrats" and can provide a reliable source of income for investors.
Third, it's important to diversify your portfolio. Investing in a variety of dividend-paying stocks can help reduce the risk of loss and provide a more stable source of income.
One area where investors can find high-yielding dividend stocks is in the healthcare sector. These healthcare stocks all have above-average dividends and include companies such as Johnson & Johnson (NYSE:JNJ) and Pfizer Inc. (NYSE:PFE).
Another area to consider is the real estate sector. Real estate investment trusts (REITs) are required by law to pay out at least 90% of their taxable income to shareholders in the form of dividends. Prologis (NYSE:PLD) is one such company that offers a dividend yield of 2.8%.
But whether you invest in healthcare or real estate, it's important to understand the risk involved. There are current headwinds to the housing market, but there is pent-up demand from Millennial. It's also important to stay up-to-date on any changes in the healthcare industry, such as regulatory changes or new drug approvals.
For investors looking for even more income, there are stocks and funds that pay out their dividends once a month. These monthly payers can provide a more consistent source of income for investors.
In exchange for volatility in the short term, stock market investments are a popular hedge against inflation. Investors typically receive both capital appreciation and dividend income, which can help offset the effects of inflation.
In conclusion, dividend investing can be a powerful tool for investors looking to generate income and growth. By understanding the rule of 72, diversifying your portfolio, and investing in companies with a history of paying and increasing their dividends, investors can achieve their financial goals while minimizing risk.