Some investors choose to generate passive income by investing in dividend stocks. This method provides you with a small payment based on the number of shares you own and dividend yield. It can be an excellent way to diversify your portfolio and help ensure you receive some type of income on your investment regularly.
Considering the Pros of Dividend Investing
One of the main benefits of using this method is the ability it provides to generate passive income, which is similar to receiving interest from a banking account. You can also take advantage of compounding by reinvesting the payment of the dividends you receive. Taking this action will help grow your principal even larger. Another advantage occurs if the shares you own rise in price. You’ll be getting paid regularly and have a chance for the value of your principal to increase.
Looking at the Cons Related to This Investment Style
Investing in dividend stocks can have a few drawbacks. Your dividend payments are usually based on annual earnings. These funds get taxed by the IRS and then taxed again on dividend distributions, which results in twice the taxation. Another con is the risk of having a dividend policy change. These types of changes can lead to cuts in dividend payments or even eliminate them. According to Money Morning, “If you’re new to investments, you have an even safer option than dividend stocks. Instead of investing in dividend stocks from just one company and risking a failure, you can look for ETFs that specialize in dividend stocks.”
Here are a few companies you may want to look at that offer dividend payments:
Investing in a company with a well-established product line like pharmaceutical giant Pfizer is one way to invest in a sector where the demand doesn’t usually fall due to economic conditions. Individuals who require specific medicines will continue to take them to stay healthy. This company has deep pockets, stability and pays a current yield of 4.1 percent.
NRG Energy – NRG
Another sector where individuals keep spending their money when the economy slows down is utilities. It serves about 40 million customers in the New Jersey area as a regional utility. NRG uses fossil fuels for generating power, which includes oil. If oil continues to trade in the $20-$50 range, it creates low input costs and should help earnings. It’s currently paying a 3.6 percent dividend yield.
Kraft Heinz Co. – KHC
In 2015, KHC had a few setbacks due to cuts in product development and missed earnings forecasts. They also dealt with an investigation by the SEC. With those problems behind them and an uptick in recent shopping trends related to their famous macaroni and cheese and ketchup products, it’s a stock symbol worth looking at that pays a current dividend yield of 5.3 percent.
Frontline – FRO
FRO is a company operating more than 70 crude oil tankers. The current excess in oil supply needs to be stored somewhere, which makes Frontline a good candidate. Its fleet of tankers will probably be used, which should help allow the company to keep paying its current 4.6 percent dividend yield.
If you’re looking for a way to receive passive income and diversify your portfolio or just get started with an investing strategy, this is a style that is popular to use.