If your goal is to create a lot of wealth, it’s important to actively find an investment strategy that lends itself to it. And a big part of your personal strategy could hinge on buying dividend-paying stocks.
Dividend stocks make a lot of sense on the one hand. Indeed, not only do they pay you over the years, but they also have the potential to increase in value over time.
But are dividend stocks the best choice for you? Or do you prefer to focus your investment strategy elsewhere?
The flip side of dividend stocks
Many people look to dividend stocks as a source of additional income. Elderly people, for example, can collect their dividends and use them to supplement their social security benefits.
But one important thing that makes dividend stocks so valuable is the money they give you for investing. While you’re working, rather than cashing in those dividends, you can use them to grow your portfolio. Over the years, this could result in a lot of wealth.
The downside of dividend stocks
Companies that pay dividends choose to share the wealth, so to speak, with their shareholders. This may seem like a good thing at first. But reading between the lines, when companies pay out dividends, that means they’re not putting the money they distribute back into the business. And that could lead to stunted growth and limited stock price appreciation.
This last point is important because if you buy a stock with the intention of holding it for several decades, you should expect that your stocks are worth much more than what you paid for them. If you stock up on dividend-paying stocks, you may find that your stocks aren’t growing at the rate you’d like.
Additionally, dividends can be misleading, meaning they can give investors a false sense of security about a company’s financial well-being. You might assume that a company with a generous dividend yield is in great shape. But that’s not always the case, and it’s important to make that distinction.
Should dividend stocks be preferred?
Dividend stocks could be your ticket to accumulating wealth. But rather than focusing on dividends, you can instead focus on companies with high growth potential, some of which might pay a modest dividend along the way.
If you are focus your investment strategy on dividend-paying stocks, you may want to look specifically at real estate investment trusts (REITs). REITs are actually required to pay out 90% of their taxable income to shareholders as dividends, which means they generally pay higher dividends than your typical business.
But again, don’t just chase REITs with the highest dividends. Instead, focus on adding quality companies to your portfolio that are managing their cash well. And also, don’t assume that buying a REIT will mean getting a big stream of dividends. Some REITs have unattractive dividends, so do your research to avoid disappointment.