The choices you make as an investor can dictate whether you end up meeting your financial goals, which can be putting your children through college or retiring comfortably at a relatively young age. And one decision you’ll likely be faced with is whether to load up your portfolio with dividend stocks.
Many investors specifically choose dividend stocks because they like the idea of generating continuous income. But dividend stocks aren’t necessarily the perfect investment for you. Here are a couple of pros — but also, a couple of cons — of going heavy on dividend stocks.
Benefit No. 1: You get a dual opportunity to make money
Your goal as an investor is to make money, and dividend stocks could make that happen in two ways. Like all stocks, dividend stocks can appreciate in value over time so that if, for example, you buy shares at $200 apiece, they could be worth $800 years down the line.
Meanwhile, companies that pay dividends often make the decision to increase those payments over time. So you could end up with dividends that grow substantially throughout the years.
Benefit No. 2: You get cash to reinvest
Finding money to invest with isn’t always easy, especially when living costs continue to eat up your income (thanks, inflation). The upside of owning dividend stocks is that you’ll get ongoing payments that you can set up to reinvest, thereby growing your portfolio even more.
Drawback No. 1: You might end up with a higher tax burden
Most of the dividends you’ll receive as an investor will likely be qualified dividends, which means they won’t get taxed at as high a rate as your ordinary income. But if you hold dividend stocks in a regular brokerage account, as opposed to an IRA or 401(k) plan, those dividend payments will add to your tax bill.
To be clear, reinvesting your dividends won’t get you out of paying taxes. Those payments will still count as income — even if you don’t take the money and run.
Drawback No. 2: Your stocks may not grow as much as you’d like
Companies that pay dividends make the decision to share some of their profits with their stockholders. That might seem like a good thing at first glance, but any time a company pays a dividend, that money isn’t being reinvested in the business itself. As such, you may find that the dividend stocks you hold in your portfolio don’t gain as much value as your stocks that don’t pay dividends.
Are dividend stocks right for you?
Clearly, there are benefits and disadvantages to loading up on dividend stocks. Think about your needs and goals when deciding whether they’re right for you.
Ultimately, know that it’s not a great idea to buy shares of a given stock for the dividend payments alone. Rather, put your money into businesses you believe in. There’s no sense in buying shares of a company you think is a disaster just because there’s a generous dividend available.
The Motley Fool has a disclosure policy.