The concept of investing in a dividend paying stock is always appealing to investors. The assumption is that an investor would be receiving dividends constantly and will never tap into their principal. But is investing in a dividend paying stock a great idea? Before investing in dividend paying stocks, investors usually conduct stock analysis to determine the long-term viability of the stock. If the stock offers a dividend, the investor is more likely invest in the stock. But it is important to understand that at the time when a dividend is being issued, the dividend does not increase an investor’s account value.
Rather, what practically happens is that an investor receives a dividend but share price on the stock drops by a similar amount. This simply means that the investor’s total account value will remain the same before and after the issuance of the dividend. So, essentially, a dividend is a kind of a mirage. Although this is the case, it does not mean that dividend investing is worthless. This is because dividend stocks play an important role in diversifying an investor’s portfolio. This is the same reason why most investors would not want to hold portfolios of non-dividend paying stocks only. They simply want both.
While an investor may basically decide to build a portfolio of only dividend stocks, this does not mean that the investment strategy is effective. Granted, this has a very interesting appeal. Dividends basically offer one of the many ways of receiving some money from investments. Some other ways include capital gains, growth of share price and interest. Since there can be a risk in investing in dividend paying stocks only, investors should consider tapping into all the possible ways of receiving money from their investments including the ways mentioned above. But generally, dividend paying stocks are worth the consideration especially in improved economic times.