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Advantages of investing in dividend stocks

BY: SEdwin | Category: Business and Finance | Post Date: 2010-02-14

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Investing in equity is one of the most important and amazing methods of making money. This is because of the returns that can be enormous when one invests in equity. The returns can also be negative in any period of time, especially when the economy is not moving towards growth, but it should be known by every person investing in stocks that it is a cyclical activity.

Another important method of making money from stocks is by investing in dividend stocks. These are the stocks that pay a large amount of dividend. There are various aspects of these dividend paying stocks that a person has to know to be able to invest in them to get a good return on their investment.

Why companies pay dividends?

The companies that pay dividends are usually the ones that are able to make a lot of money as profit. The profit in these companies is possible because of the continued growth that occurs. The growth in turn can lead to expansion of business. There are some companies that pay a percentage of their income as dividend to the share holders to repay them for being a part of the company and investing in it.

Advantages of dividend paying stocks:

1. Passive income:

The dividend paying stocks help the person who has invested in the company to earn a passive income. This income can be quite large if the holding is large. The passive income is a great advantage of dividend paying stocks.

2. Capital gains:

The money that is invested in these stocks can also grow as the company grows. The dividend and also the capital growth when a person invests in the stock gives a double return to the investor. This helps the person to be able to earn in more than one way.

3. Increased buying by investors:

As the company keeps giving a dividend to reward its investors, there will be an increased buying by various institutions and investors. This will again increase the share prices of the company and so the investor will be able to get more returns on their investment.

Disadvantages of investing in dividend paying companies:

Though there are not many disadvantages of investing in a company that has been paying a lot of money as dividend, one has to be careful that they do not invest too much in these companies. This is because since these companies pay a lot of money as dividend, they may not be able to invest a lot on the growth of the company. This can at times lead to the stagnation of the share prices of the company.

Another disadvantage of investing in the shares of these companies is that though the company has been giving out a lot of dividends, the trend may not be sustainable in a situation where the economy is in a recession. This can be very disastrous for people who have invested a lot in these companies.

These are the various advantages and the disadvantages of investing in shares of high dividend paying companies.

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