You may be wondering how stocks make money. To start, there are two basic ways of earning money when you buy shares in a company: dividend gains and capital gains. Dividend gains are earned through a distribution of company profits in the form of annual or quarterly pay-outs to stockholders. On the other hand, capital gain is earned when you sell stocks for a higher price than you bought them for.
There are, obviously, pros and cons to both forms of investment. Earning money through capital gains might be a more exciting way to make money, but it could also be more risky. If you, however, prefer a dependable way to earn money from your investment, dividend income is the way to go.
Regular Income
Dividend gains are paid out at regular intervals to stockholders, which means that you are guaranteed a minimum annual income. Earning money through dividends is equal in many ways to other low-interest-rate investments, such as savings accounts, money-market accounts, or bonds. Yet, dividend pay-outs are normally higher than the interest earned from these other low-interest-rate investments.
Overall, dividend income is regarded as a more permanent and less risky source of income.
Lower Risk
Although you will receive dividend payments during pre-established pay-out periods, you can only earn capital gains once the share price has increased and you are able to sell your stock. As a result, you can’t be sure when, or even if, you will be able to earn profit. Although companies can, at times, adjust dividend percentages, dividend pay-outs, on the other hand, are not directly linked to share price. This means that you could be earning dividends that may, over many years, amount to millions, although the share price of the company might have stagnated or even fallen.
Furthermore, if you are going to go for dividends, you will most likely be investing in an established, profitable company, whereas if you try to earn capital gains, you will be throwing your money into a growing company that will be reinvesting all of its profits into further growth. If the company grows, you could turn a profit, but of course, growth is not guaranteed.
Less Fuss, Less Trouble
As mentioned before, earning money through dividend gains is regarded as a long-term and reliable source of income. Although you will, no doubt, still keep an eye on the profitability of the company of which you are a shareholder, you do not need to constantly be aware of stock prices in order to decide when to hold on or when to sell. Of course a company’s dividends may be cut if earnings decrease over a long period of time, but a fluctuating or weak stock price will not influence dividends.
Deciding whether to pursue dividend or capital gains depends on many different factors, such as the economic climate of the time. Given the current global uncertainties, it is probably advisable to choose a lower-risk, more predictable option, and earn your money through dividend gains.
Contributed Content
Founder Dinis Guarda
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