Investing in stocks is a good way to grow wealth in the long run, and it's a wise strategy to employ in the course of saving for retirement. But if you're going to put money into stocks, it pays to load up on those that pay dividends.
If you're not familiar with the concept, dividends are payments issued to stockholders when a company has excess capital at its disposal. Dividends are typically paid quarterly, though they can be paid at different intervals. And sometimes, you'll get a special dividend -- a one-time payment that's generally larger than the typical dividend its issuer normally pays. With that in mind, here are three reasons to consider adding dividend stocks to your portfolio.
1. A steady income stream
Companies that issue dividends aren't required to do so; but those with a strong history of paying them tend to uphold that practice for the long haul. As a result, loading up on dividend stocks is a good way to generate ongoing income. You can use those quarterly payments to supplement your income during your working years or, just as importantly, supplement your Social Security benefits during retirement.
2. Protection against market downturns
When market corrections or recessions strike, stock values can plummet on a whole. That's bad news if you rely on your portfolio as an income source or need to tap your portfolio immediately, because if you sell off investments in the midst of a downturn, you're liable to take losses. The great thing about dividend stocks is that they tend to keep paying even when their values drop, which means if you need access to money, you can get it without having to take a hit on investments.
3. More money to reinvest
When you receive a dividend payment, the choice of what to do with it is yours. You can take that cash and use it to pay bills or take a vacation -- or you can reinvest that money to grow your wealth. In fact, you can set up your investment account to automatically reinvest your dividends so you're not tempted to cash them out, thereby effectively forcing yourself to save more. And if you collect dividends regularly and reinvest them consistently, you'll effectively capitalize on a well-known strategy known as dollar-cost averaging.
Choosing dividend stocks
When buying up dividend stocks for your portfolio, your first inclination may be to choose the ones with the highest dividends. That strategy makes sense in theory, but remember, you also want to look at factors like company strength and consistency. A company that pays a substantial dividend but has a rocky financial outlook probably isn't a great choice, because if its stock value goes down, you stand to lose money.
You should therefore take your time in deciding which dividend stocks to buy, and vet each company individually. You can also consult this roundup of high-yield dividend stocks. All of these stocks are projected to offer solid growth not just in 2020 but well into the future.