A dividend is a part of a company's profit that is paid out to the shareholders, commonly in cash or stock. For shareholders, dividends present a great way to get periodic payouts on a high-yield investment. However, like all types of investments, there are drawbacks to any plan that routinely pulls out money rather than continues increasing revenue.
Pros of Dividends
Dividends certainly do have a place within the financial world. They provide a way for investors to place a large amount of capital that can then be used as a source of income, since it regularly brings in money. When you choose dividends, you can look forward to:
Profit while retaining a stake in the company - Normally, a stockholder would have to sell his or her stock in order to profit from his or her investment in a company. Dividends allow investors to profit from their investment in the company without selling their stock. This means you can look forward to regular returns.
Short-term results and long-term opportunities - An investor can continue to receive dividend payments from the company as long as the investor continues to hold stock. This can lead to significant dividend payments for a long-term investment, even though you're seeing results over a short-term time frame.
Visible indications of your investment's security - A continued, increased dividend payout is considered to be a good indicator of a company's continued success. This allows you to quantify your gains easily.
Cons of Dividends
Despite their benefits, dividends aren't for everyone. Before you and your financial advisor decide on this course of action, you'll want to consider the following:
Dividends are not universally available - The Board of Directors is responsible for deciding whether or not a dividend is to be paid out to its investors. However, even if a company makes a significant profit, it is under no obligation to pay a dividend.
Tax repercussions - Dividends are often criticized as being subject to double-taxation, as the company is taxed on its income and the individual shareholder is also subject to paying taxes on the dividend payout. In the United States, dividends are subject to a 15 percent dividend tax rate. This is higher than what you can expect to pay on other types of investment windfalls.
Making the Decision to Use Dividends
Before you decide whether or not dividend investing is right for you, talk with your financial advisor. While dividends can be a great way to see regular returns on your investment, you might find that your unique needs are better served with stocks, bonds, or other financial options.