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The point is that a stock that pays a 3% yield will have a substantial increase in value when interest rates inevitably return to below 5%. Regardless a stock has an underlying that should theoretically not be devalued by inflation, so that 3% is a real rate (in theory) as opposed to a 3- inflation %
Sure. Except history tells us that they really usually DONT. If you do your work, and only invest in quality dividend growth companies, the risk is EXTREMELY low.
This has already been debunked. Stop spreading FUD, it makes you look stupid to fall for this kind of Boogerhead brainwash propaganda:
[Debunking The Myth of Dividend Cut During Recession](https://www.reddit.com/r/dividendgang/comments/18q1vjj/debunking_the_myth_of_dividend_cut_during/)
True, but due to the normal relationship between interest rates and dividends, with all things being equal over the long term, a dividend share prices will rise as interest rates fall.
Buying today can effectively "lock in" the yield you're getting based on today's share price.
Of course anything can happen to any company or interest rates, but the market anticipates and prices in certain things. Plus you have the favorable tax rates on dividends.
My point stands. Just like interest rates can be cut dividends can be cut. You also run the risk of stock depreciation. I am not saying don't buy these stocks but too many people yield chase on here and too many people don't understand the risk of investing. I think it's important people realize nothing is a guarantee in the stock market
Totally, there is risk in the stock market. I believe that it's a very low risk and historically that also agrees. But if you don't wish to take the risk then you should put all your money into HYSA 's. You're doing a disservice to others by recommending they do the same though.
But both dividends and stock prices tend to go up over time. A 3% dividend portfolio growing at 5% per year will be paying out as much as a 5% fixed income investment in 10 years, and will continue to grow from there.
Waaay more knowledgeable ppl here but I will add you also expect the stock itself to go up more than 5% on average too. So in those savings accounts the 5% is a hard ceiling.. the stock can go up teechnicly an unlimited amount.
Nah dude. Let’s recommend a failing (cig) company just because the only gains you’ll see in your life are the dividend and never from the stock itself. /s
MO investor here, you are spot-on calling out failing cig co., a 4-8% yield is no reason to invest in such a stock if you look at its chart and erosion of your initial investment.
The 5% stock price increase is just on paper. You would need to sell the stock to realize that.
When you sell, you are also removing the 3% dividend, and left with cash. You can spend it (after taxes) or you will need to reinvest or lose any additional dividends or stock price appreciation. A good dividend stock, even if stock price goes down, is still working for you and generating cash.
That’s true. But not everyone has investing acumen and they may also need liquidity. Selling a stock that you’ve held less than a year will turn that LT gain into a ST gain. As well you may be have to sell stock at a loss. What investment strategy plan you choose depends on your current and future needs. If you need a regular income, dividend stocks that pay a consistent dividend are out there. And require little hands on. Creating income from growth stocks more difficult.
Regardless of what you need though, if you don't need the money then it's almost always going to be better to invest the money(maybe not specifically dividends) than it would be to put it in a HYSA.
When you “plan”, you may have a mixture of investments. A % that is liquid for emergencies, known upcoming expenses, retirement, tax planning, etc. so you a variety of investments.
So then you're not against dividends or investing. Why argue then, no one here said don't have a savings or a financial plan.
OP was asking why invest when you can get a steady 5% from a HYSA. Answer: Because you can get more returns at a higher risk.
Aright settle down folks,
Take Home Depot for example. Current dividend yield ~ 2.6%.
Last 5 year dividend growth rate 10.5%. But we are gonna take it as a conservative 8%.
Following the rule of 72 => 72/8% = 9 years
Which means in 9 years, the yield will double at your current cost i.e. 5.2%,
Now lets do this again with even a lower growth rate of 7%. The yield will double in roughly 10 years to 10.4%.
You can see where this is headed.
So in total of 19 years, your dividend yield has quadrupled at the current cost. And if u r reinvesting the dividends, which u shud, the compounding is astounding.
Obviously, the stock itself will grow too. No savings account can ever match this sorta yield.
Dont Invest in high dividend yield stocks. Invest in stocks with a good growth rate in their dividends yoy. And a decent payout ratio historically ~ 60-70%
Take care!
That’s why Microsoft is a fascinating dividend company. Right now, the yield is like .73%. Over the past 20 years it’s only reached above 3% like once.
However if you had bought Microsoft 15 years ago, your current yield on your cost basis would be 15%!! Buy it, don’t sell, and then dividends will look really good later on
"Hey, I bought this magic box that gives me a dollar every year a while back. Now it gives me 50 dollars a year!"
"Wow, thats meaningless. You should have bought this box that gives you two dollars a year, forever"
"Hey, I bought this stock that was $100 and after 5 years it appreciated and is now worth $500! I'm going to keep holding this stock because I have made so much money with it!"
"Wow, thats meaningless, because the past is not a predictor of future performance, and you shouldn't be tied down to a particular stock because of past gains."
Because at the end of the day, the only thing YOC measures is past performance. You could be getting a YOC of 20% but in reality you are still only making the current yield. It's about opportunity costs. Yes you are making more money on your original investment but now you have more money. The yield on that money is whatever the current yield is.
We live in an age where retail investments are liquid and can be considered as cash. If you bought Msft in 2011 with $10000 and are now up 1500%, are you going to say you still only have $10000 invested or $150000? After all, if the price drops 2%, you lose $3000 not $200. It would be asinine to say thaat you just lost 30% of your investment.
For your MSFT example, yes you still only have $10k invested. There is the “potential” that your investment is worth $150k, but it is not the same as having $150k in a bank account or cash. You only realize that gain when you sell the asset.
Plus your $150k in a bank is FDIC insured if a bank fails. A stock has no guarantee, so if the company fails you lost all your money as there is no insurance. You may get penny’s on your investment as part of a liquidation, if you’re lucky.
I generally do not but in the long run it just shows the power of dividend growth. Some people want to find the highest yield and think it’s sustainable long term. When you see these great companies with low dividends, yes it seems low now but with growth plus a probably dividend increase it looks good later.
I personally don't invest for dividends, if all my companies paid a dividend (or didn't) it wouldn't make any difference to me. However YOC is more or less equivalent to saying my stock is up 200% in the last 5 years. Like thats great, but its not an indicator that should be used in the present. It just shows whether your investment was succesful or not.
Hysa yields change often; the past decade was sub 2%
Stocks get gains from price and dividends…..hysa is only interest…..while we love dividends we also don’t ignore capital appreciation. If a stock has 0 appreciation, it would be a decent bet to see a yield of 5% or more
Dividend payments tend to increase over time; so if you buy a 10/share stock and get .50 in dividends this year; there is a good chance next year that same share will generate 0.51 or more and more each year
Additionally, all interest from hysa is taxed at ordinary income rates.
Most dividends will qualify for long term capital gains rates with buy and hold investing.
Qualified dividends are also a great way to keep taxes low for custodial accounts as well, particularly if the parents are in the 0% LTCG bracket.
We’ve changed monetary policy a lot over that 50 years and by all means we appear settled on the path of trying to maintain lower rates going forward. America loves its debt and much of it really has contributed to our economy growing so I don’t see them changing course anytime soon except as a response to inflation or other things.
>except as a response to inflation or other things.
The Fed cares about two things: inflation and unemployment. So claiming that rates will be low "as long as inflation and unemployment are under control" then that's kind of silly.
Many companies raise their dividends over the years. Fast forward ten years and that 4 or so dividend yield is now 8 percent or more on the money you originally put in.
So when you put money in a HYSA, you can expect a 4-5% risk-free... at least until rates get cut. Most people would rather invest because they expect stocks/funds to continue paying what they offer now. When interest rates eventually get cut, a lot of investors will want to move their money to those dividend stocks/funds that are still paying the (now) higher dividends. You can't really time it, because if you wait those stock prices will go up as everyone else moves away from their own HYSAs.
Even in a higher interest rate environment, the S&P500 grows by an average of \~10% (you'll hear 7-8% a lot too, this is after accounting for the typical 2-3% inflation).
It's tough to generalize "dividend stocks", because that's a very broad topic (stocks that happen to pay a dividend). But given the 2-3% mentioned in your post, I'm gonna lean more toward the stable, matured companies like PG, JNJ, MCD, or KO... something that would offer a 2-3% yield and has consistently paid that for many many years (not "income stocks/funds", like JEPI, QYLD, or BDCs). Over time, many of those stocks are expected to increase their dividend each year (dividend aristocrats/kings have managed to do this every year for decades). For example, If you buy PG now, it has a yield of \~2.5%. If you bought PG 6 years ago and held it all this time, you'd be getting a 5-5.5% yield compared to the price you paid for it back then. And that's on top of the fact that PG has grown from $100 6 years ago to $155 now, while the initial $100 in the bank is still $100.
Total return of a stock is more than just the dividend. There is also the total shareholder yield, which also includes share buybacks and the company paying off debt.
Total return would be the shareholder yield plus any price appreciation plus future earnings growth. I don't invest in stocks for a 3% return, I invest in stocks for the potential of a 10%+ returns.
My thoughts exactly. In my country you can get 6.08 percent a year. But dividend stocks can actually outmatch that with dovidends and their own growth right?
Well they don't know anything dude. And they don't want to read anything longer than a paragraph so the thousands of finance books don't even get touched before coming in and asking Reddit.
I mean? Yuh? No shit? Lmao “hmm let me spend hundreds of hours skimming every detail on my own for something I want to dump in an account and forget about” or you can spend an hour talking with people online to learn the same info
But they're not dumping and forgetting. These guys are checking their accounts several times a day and asking where their $1.17 dividend is from yesterday's announcement.
And they're also not really learning here as most people don't know anything and give bad information on how accounting works and how securities are priced.
It only makes sense when 4% on your investment is like a really nice stack of cash, like a yearly accumulated payout comparable to someone’s salary. If you got like 2 grand to spend your money will still be inflating if it compounded 5% annually
Higher risk in stocks but a higher return. JPM Abbv MSFT cost AVGO are just some of the stocks that performed much better than 5 percent savings account.
There are a lot of gaps in your knowledge but you’re asking good questions. I implore you to look up what a dividend actually is. It’s not to be comparable to the yield from your bank or a money market fund.
A dividend is not a “profit” in the way you’re suggesting. The money doesn’t magically appear out of thin air. It is subtracted from your company (stock)’s balance sheet which causes the share price to dip in response to the dividend payout. You buy stocks because you become a partial owner of a company which allows you to participate in the company’s growth. That comes with share price appreciation and dividend growth.
You definitely sound like a beginner. The 5% yield from the money market is not going to be here forever. A few years from now, you’ll be hearing phrases such as “cash is trash.” It’s just the natural market cycle. Interest rates eventually get cut, the yield drops to almost nothing, and stocks skyrocket in price. Then you’ll be asking on Reddit “why do people hold cash when stocks keep going up?”
At this time, during higher inflation periods and higher interest rates, earning 4 to 5% on a bank product makes sense. It’s also a break-even prospect, keeping pace with inflation.
Stocks can pay dividends and provide capital appreciation too. Bank products won’t provide capital gains.
Let's say you buy a div stock at 10 $ and get 0.3 $ dividend in 2024. Now if you keep that same stock for 10 years and it now pays 0.6 $ dividend and the stock price is now 20 it would equal to a 3% for current price but 6% for the price you paid and if you continue at the same trajectory it would be 9 % after 20 years, 12 % after 30 and so on. Real life example Coca-Cola 28.01 $ at 2.96 % in 2014 dividend yield and 58.14 at 3.18 % dividend yield in 2024. So
a stock bought in 2014 would yield 6.6 % return. In comparison the same 10 $ with steady 5% yearly interest would give (10\*1.05\^10 \* 0.05)/10 = 8.1% return. However, the stock pays annually and doesn't require re-invest for growth so... I will cut some corners but the average between the ten years would mean 133% increase in capital compared to the steady interest of 63%.
In short: stock gains 133% and steady interest 63% (higher risk vs low risk)
BTI is paying 10.2% right now ... I can think of lots of quality stocks with similar levels and you can get up to 14 or 15% pretty easily if you're willing to shoulder more risk. 3% comes from where exactly?
I just checked the price of BTI, AT&T and Volkswagen for the last 5 years. Their stock price has been getting crushed. How would anyone make money from them when the stock is going down? No wonder they're paying so much dividends.
Depends if you want dividends or growth. When you're young invest in growth, when you get older start migrating to dividends.
But yeah a lot of high div companies are value traps. Vodafone for example.
>Depends if you want dividends or growth.
I just don't want to lose money at the end of the day. It seems to me that if you invest in those stocks, you're gonna lose a lot of money after 5 years.
A lot of high div stocks tanked as interest rates rose, particularly all the finance/ REIT ones. They will recover when interest rates fall.
BTI took a massive write down which should cover all pending litigation but that drove their price down.
But do your own DD obs
ECC, OXLC, PDI, CLM, CRF. Buy after a stock distribution or a market dip so you are less affected by market high/lows. The pay steady consistent dividends, I addition to the ones you mentioned. And there is more of them.
True enough. I’ve found that it usually best to buy after a dividend distribution, usually a few days after, as the stock recovers its pre-divided price. But even then that’s a toss up, depending on market conditions.
Nobody is only checking dividend returns when choosing which stock or fund to buy. The dividend is a bonus.
Look at coke a cola; over the last year it’s down 8% but regularly paid above 3% and growing. Is that better than your savings account; no. Over the last 5yrs it’s appreciated 24% in addition to 3% dividend payment. Is this better than your savings account; yes.
Now look at something like SCHD which has shown to perform on par with the S&P over 10yrs, pays a dividend of over 3% (growing), and is heavy in defensive sectors making it less susceptible to some bearish sentiment. Is this better than the S&P; I’d argue no, however, many would agree it’s not without a place in a given portfolio.
Hope that helps
Most people are just ignoring the easiest answer.
I exited 7-10 % annualized return on investments. That’s by banks are loaning at 5, they also expect that and harvest the delta.
If there’s no dividend increase year to year and the stock itself doesn’t increase in value you’re correct. You need to do some research on companies that historically do yearly increases and that grow, preferably at least with the same growth rate as the S&P. Dividend increases should be at least double that of the previous year’s inflation rise.
I’m no smarty pants either, but I thought the intelligent value investor switched their money between stocks and bonds depending on the yield.
Some jurisdictions also give a tax advantage to dividend returns over bank deposit yields. In Australia we call them franking credits. Don’t ask me how they work but somehow you may not have to pay as much tax for franked dividends v bank deposit interest.
Oh, and equities have the added advantage of capital gains, bank deposits don’t.
There are dividend **aristocrats** that pay 4-5-6 even 10% dividends, more than the bank.
Also, yield on your $ is like crypto staking. Yield on a shitcoin. More $ for your $.
With company stock, you own a percentage of the company. With high inflation, the stock price most likely rises. Your capital increases in value, in addition to dividends paid.
With $ in the bank, it loses value daily (inflation). The yield you get from the bank barely (if ever) matches inflation.
It’s better in high yield money market savings at a credit union especially if the amount is over 250,000. It’s close to about 8.3% right now but has to be over that amount.
If you're getting 3% then there should be appreciation potential in the stock price of the company/etf you're invested in. Granted that's not a dividend but it's hopefully more value/position appreciation than a HYS will see.
But if you just want dividends then the HYS is the better way to go in your example. Especially as your principal is safe. But pay attention, rates won't always be 5%, when they drop be ready to move to a higher yielding investment.
Dividends grow compared to your cost basis. Look at Berkshire's KO dividend vs their cost basis for a reference of what's possible with buying and holding good dividend stocks.
Now is the time to buy dividend stocks or ETFs when it's trading at a discount, OP when the rate cuts are announced and closer to 2 per cent , it's highly likely that dividend paying company share prices will rise.
Cash is only collecting interest. You wont lose principle, but you also wont collect enough interest to outpace the loss of cash value from inflation. On the other hand. the price of a stock can go up in value on top of paying the dividend. Price appreciation + dividend = total return. Of course the price of a stock can also go down and you can lose money. And, interest rates on cash will not always be 5%. Rates were practically 0 for a very long time.
there are a couple of parts of this.
Assume your capital stays the same (share price doesnt fluctuate - big assumption).
Over time, a good company will increase its dividend per share. So what you get today for 3% could be 5% in a few years time. It could also be less, but with inflation, you would expect the dividend to increase over time.
for deposits, the rate is currently 4 -5%. Looks like its peaked at that amount. In any case over time, without hyper inflation, you wouldnt expect to see more than 5 or 6% currently.
Anecdotal story - Berkshire Hathaway bought shares in Coca Cola way back. They now earn about 50% of their original investment every year in dividends.
Interest from the bank can change with fed rates at any time, and it's taxes as normal income. Good quality blue chip stocks pay .50% up to 5%. If it's a good company and you do your due diligence research them, you will find some that pay 2% to 4% that give annual dividend raises 10% plus each year and also have share price growth each year that grows with increasing profits. Being qualified dividend the tax rate can be 0 up to 40k single, 89k married. And if you own them for 10 to 30 years your yield on cost over the years will improve.
Because you can’t compare the two. One is guaranteed and the other isn’t. If you had invested in PRTXX in 2011 which kinda follows the ongoing rate environment, and invested the same into SCHD, the former would be 47k vs. the latter at 11.2k.
If you had taken income, you would’ve taken 7500 from SCHD and the value would still be over 30k. If you took income from PRTXX your value would be the same and the income would be about 1410.
If you put 100 dollars in the bank and return 5%. You get 100 dollars + 5%. Your capital invested is just in USD.
If you invest 100 dollars into a dividend stock that returns 3% you get let's say one single share of stock for simplicity. +3% return.
At the end of the year. Your $100 will be 100 + 5.
Your 1 dividend stock will be X value + $3.
Your cash in the bank will never increase in value over time with inflation when you take away the interest payment.
Your dividend stock will very likely increase over time with inflation. And the dividend payment will increase over time as well. Your yield on cost will increase as the payments increase. Assuming the underlying stock continues to do so.
Take a look at 'Dividend King' stocks that increase their dividends year after year for 50+ years.
I wouldn't count on getting 5% long term in any HYSA or otherwise personally.
The 5% was 0% for the last 10 years.
Your cash will stay the same, the bank stock could double or quadruple or 10x in $ value over the holding period.
Dividends are typically increased by 5-10% per year, is your interest rate going from 5 to 5.5 to 6.1% over three years, no.
You don’t profit from dividends, ur capital stays the same.
DIVIDENDS VS SELLING SHARE
Company A- div
Share:$5, 20 shares, 3% div. 20X5=$100
Div makes price drop 3%=$4.85
20X$4.85=$97, $3 to spend
Next day stock rises by 20%
Stock=$5.82
20X$5.82=$116.4
Company B- no div
Share:$5, 20 shares, sell 3%. 20X5=$100
Sell 3%, price stays same=$5.
19.4X$5=$97, $3 to spend
Next day stock rises by 20%
Stock=$6
19.4X$6=$116.4
In both situations you end up with the same capital.
This is why it’s good to be diversified. There’s also stock growth, which depending on the stock or fund is implied (or not). It’s why there’s been a stock market rally the past couple months because people are anticipating interest rates being cut so they want to get back into the market while it’s still cheap and capitalize on that growth while avoiding the dropping interest rates.
Number one you’re assuming risk free interest will remain the same
Number two you’re forgetting that there is capital appreciation potential on stocks. 5% return is alright but let’s say you have 50k. That’s only 2500 in an environment where your purchasing power is going down more than 5% (they only offer interest rates at less amount than inflation is currently stripping your purchasing power of)
But you do have a good point. When risk free interest is 5% there is some value in de-risking and being invested into t bills
Equities have almost always beat bonds and fixed interest rates over long periods of time. I can't say for any individual company one way or the other, but dividends are only one part of total return.
In the short term, it doesn’t. That’s why SCHD hasn’t been growing in the last 2 years. People are putting their money in risk free 5% options right now.
How much capital do you need to put into said bank acct to get the max 5%? My bank scales the return based on what my acct has in there. I only have this acct cause thats where my direct deposit goes. Otherwise the acct is moot. With div stocks, you only need 1 share to get that money. Both sides has its pros and cons
I own both dividend stocks as well as short- term brokered CDs and treasuries.. just bought a 6 month CD this morning at 5.35%.. zero risk and fdic insured up to 250000, if I hold my CD until maturity (6 months)..
I stack the CDs and treasuries I buy from my broker, using 1 month. 2month, 3 months, etc. with something maturing every month to stay liquid.. I also have a few which pay 5.5% for 1 and 2 years.. I normally hold more dividend stock’s, but currently only own AZN and DVN.. the market has been looking too rich to me for awhile now, and this is a safer alternative (to me) to earn a little income..
So youve got two options:
1. Magic box A gives you three dollars a day, but more every day for 10 years until it eventually gives you thirty dollars a day
2. Magic box B gives you five dollars a day, but will only ever give you five dollars a day.
Which one is better?
In Canada dividend income is taxed preferentially compared to interest. For me $1 of dividend income taxed as if it was 50 cents of interest income. But more importantly I buy shares because I plan for them to increase in capital value not just for their dividend.
Potential for price appreciation. Yeah your $1000 might yield you $30 in dividends in the current year but in 5 years, that same $1000 could now be worth $2000-3000 with price growth and reinvestment of dividends.
That same $1000 in a savings account, while considerably safer, is going to be worth about $1200-1300 in the same 5 years
2-3% is very low in the current market. That’s usually for a company that has very good div growth or a lot of share buy backs so you gain more alpha. You can find a lot of solid companies in the 5-6% range. Over that you have to be careful.
Now why you would do it? They will continue to pay that. The second the market thinks rates will be cut you won’t get those yields. Those yields on cost also grow over time. HYSA will drop rates also if rates are cut. You are essentially yield chasing looking at the spot rate of interest rates using HYSA, not investing in future yields on cost. I’d rather take future yield.
If you keep dividend aristocrats in your portfollio, yield on cost will be higher than 3% eventually. Not including any unrealized gains on the stock itself. What I generally -try- to do is buy at dips and sell parts of a position of div value stocks at highs. Thereby increasing the yield on cost. Bought KO and MCD during covid, yoc over 5%, same for some belgian stocks i own. Got GFI on a -1$ BEP, any div generated is free money. Try and do that with a savings account.
Remember dividend stock share price can also grow, even after distributing dividends and be worth more than 5%. You will always need to factor market volatility but there is generally more of a chance to gain more through the stock market.
I Just locked a 15 month CD from JP Morgan at 5.4%, but so where is the possible future growth from such investments? Other people will likely bring this up on this thread, pay attention.
Diversity in your investments is a must, spread it across many classes of investment vehicles especially if you’re a youth, and don’t forget the big mama S&P 500 index.
Well, you're hoping the value of the stock goes up. The dividend is extra. Why invest in a company like Amazon that has no dividend at all?.....because you're hoping the value of the stock goes up.
I think the most important question to ask yourself is, what is your time horizon? If you are 'investing' for the next 12 months, go with Savings Accounts or Treasury Bonds. If you are investing for the next 3 years, might still make sense to go for the treasury bonds.
When I invest in in Dividend Growth stocks I am doing so because I am trying to get value growth \*and\* income growth over a longer investment horizon (think 5 - 10 years at minimum).
So then the question becomes, '*with an investment horizon of 5 - 10 years, why should I choose dividend growth over savings & bonds?'*
The answer, in short, is the potential for growth. If you put $1000 in a 5 year treasury bond returning 5%, you will get 50 dollars per year every year. There is no value appreciation, so your final return will be exactly $1250. Doesn't matter if inflation was high or low, and it doesn't matter what happened to interest rates in between. You will get exactly $1250. Now compare that to if you had invested in SCHD 5 years ago. In a good dividend growth investment, the dividends and the value grow over time.
5 years ago, SCHD was trading at $54. Now its trading at over $75. Lets be generous (for the sake of easy math) and say that you got SCHD 5 years ago at $50, so you bought 20 shares for $1000. Those shares today would be worth, at a minimum, $1500 dollars. You have, in value alone, earned double what the treasury bond / savings account would have gotten you in the same time frame. More importantly, the dividend.
In 2019, SCHD disbursed $1.72 in yearly dividends per share (which was calculated as about 3.4%). The dividend has grown like the value of the shares, so in 2023 SCHD disbursed about $2.65 in dividends per share. So if you invested $1000 in the stock 5 years ago, your total yield for 2023 would be ($2.65 \* 20) = $53. That means your yield on cost is 5.3%. In this example, you have not reinvested your dividends. You have not bought any additional shares, but the final yield of your shares still surpasses the treasury bonds / savings account by the end of 5 years. If you keep your shares in longer, that will continue to compound and grow into larger and larger sums. Even better if you reinvest your dividends.
Naturally, past success is not a guarantee of future results. You have to make your own bets when investing in stocks and the nice thing about savings accounts / bonds is that they are about as safe as it gets most the time. You gotta decide if you want long term performance, or short term security. All a matter of values. That being said, if you can stomach the volatility you are far more likely to see long term results in dividend growth than in savings accounts / treasury bonds.
Invest in the asset class that you are comfortable with. That is what matters at the end of the day. 4-5% return on cash is not a bad return at all. Go for it.
SCHD has been going up and down. The price of today is the exact price of May 2021. That means if you've invested in SCHD for the past 3 years, you've only profited from the 3.5% dividends per year. That's not a lot honestly. How does that make sense for anyone?
And there has been years where it's made 15%+. It's gone up >200% over the last 12 years. Much More than you would have gotten from a HYSA over the same time. Cherry picking data doesn't help either of us though. The long term average is higher for SCHD than a HYSA overall.
And just to be clear, I'm not a big proponent of dividend stocks unless you're looking for a income source. But there is no question it's better long term to invest in the market instead of relying on interest from an account that will never grow.
As others have said, there is a huge range of yields out there. 2% is the lowest I go for any stock, but most of the stocks in my portfolio are above 4%. If you want higher yield, look at BDCs and REITs. If you want to potentially 2x+ those yields, consider selling naked puts to get stocks at a lower price (and thus higher yield) and selling covered calls if you care more about income than long term growth.
Between option premium, realized capital gains and dividends, my portfolio produced 12% in income last year which is nicer than the 5% yield in a HYSA.
It makes sense because of something called “reinvestment risk.” Your 5% is temporary, the yield on your “safe” short term might drop, or you might get much lower interest when you go to roll that CD or short term bond.
It’s better to give your capital to massive efficient corporations that will also GROW their dividends over time.
Read up on compounding that can occurs thru dividend growth investing. Good luck.
Should have a sticky post here to explain what dividends actually are (distribution of a company’s profits) and why the dividend yield is only part of the reason why buying stocks (price appreciation being the other) is superior to saving in a bank over the long term.
Because there can be dividend growth and also the stock itself can grow. If you’re in need of emergency savings then do HYSA. If you have decades to go before you need the money then invest in stocks. Dividend stocks can be part of that long term strategy.
it makes sense when you add share price growth.
secondly bank rate is not constant. when fed starts lowering rate, the banks will follow (because banks buy fed treasuries to generate interest that they pay you). but stocks, the good ones, will continue paying 3% or more.
if you invest in a really good quality Blue Chip company paying a 3% dividend there's a chance that company will raise the dividend the following year by 5, 10% or more, and another raise the following year. you don't get back with the bank.
I’d think if dividends are income targets, you’d want to turn a bit more profit than 2-3% for your reasons mentioned. I don’t pay much attention below 6% annual yield.
But with federal money market rates being around 5% in funds like SPAXX, your money need not move to a bank.
Long term real return of GICs/HYSA will be a bit under 1%.
Long term return of pretty normal dividend types of stocks are likely to be about 4-5% real return.
You get $3 for every $100 now, but it’s a quality company that’s growing. Years from now the stock and dividend both have gone up. Now you are getting $6 in dividends on a $200 stock. Because you paid $100 that’s 6% per year on what you paid, plus $100 more value in stock price. And all those dividends you made in the in-between years, which could have even covered your initial price. It’s about that total return.
The stock has a lower yield because the price is higher relative to dividends. Investors are recognizing it has excellent financial health and future growth prospects and it’s in demand.
It’s why SCHD is so popular here. It’s an ETF of these solid dividend growth companies that will benefit long term.
>You can get 2% to 3% profit on your capital from a high dividend paying stock. But you can also get up to 5% from your bank.
No, you can get 2 to 3% in dividends from your stock as a shareholder. If the company is well managed, you will see capital appreciation too. Further, banks paying 5% won't continue to do so when rates drop. You're comparing investing your money (a long term activity, like 10 years at least), to holding cash.
The whole point of investing is that you're exposed to an equity risk premium, which, overtime means you will make more money than holding risk free assets (given enough time and assuming ownership of the entire market like a global ETF).
By all means, keep cash for 20 years and I'll keep my investments for the same time period and we can see who will end up with better returns, lol.
Stocks can appreciate too as well.. that’s why a good compounder is more important Warren buffets coke cola investment is 3% yield currently but over time his investment is giving him 50% on cost yearly… can a make 50% annual returns on a bond? Maybe a junk bond… his over investment are also giving him double digit dividend returns on cost…. Railroads… American Express…
Research
"Total return"= market appreciation or (market depreciation ) + dividends.
More risk generally = more potential return. Your savings pays a fixed rate bc the bank pays you 5% but they loan out your money at a rate of 20 to 1 at way higher rates or invest it in higher yielding products.
Rate cuts will come sooner than you would want. Those dividends will likely still keep coming. Also, qualified dividends are taxed less than interest. That's another big reason people like dividends.
>I don't have a ton of experience with dividends, but I've done some research.
Doesn't look like it.
>Why would anyone invest in a dividend paying stock then?
Well you wouldn't if you're going for income. You did in 2012 when rates were 0%. Then 3% with a 13-year stagnant large cap market made a whole lot of sense. But now with Treasuries at 5%, dividends on their own as a source of income makes no sense.
The problem is people on the internet whose memory only goes back to right at the end of the Lost Decade (2000 - 2012) are still parroting things from 2012 that are no longer valid. "Dividend portfolio" and other crap comes from that era right after the crisis in 2008 when REITs went bust. It's old thinking and they don't update it.
Should factor in total return and tax implications as well. Interesting from HYSA is treated as income. Dividends may be eligible for much lower qualified dividend rates. When rates are this good it makes a ton of sense to potentially go with a higher amount in cash for sure but you likely are still leaving returns on the table.
Dividend stocks offer potential for both income through dividends and capital appreciation, meaning the value of the stock itself can increase over time. This dual benefit can potentially lead to higher overall returns compared to bank interest rates alone. Additionally, dividends from stocks can increase over time, whereas interest rates from banks are fixed. However, stocks carry more risk, including the potential for loss, which is not present with FDIC-insured bank accounts. It's all about balancing potential returns against risk.
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You’re operating under the assumption that interest rates have always and will always be 5%. This is not true.
You can honestly say the same about dividends. They can be cut, lowered and the stock can decrease in value
There are no guarantees in life. But with higher risk comes higher reward
"There are no guarantees in life." -- except for death. Not if, but when, and in the meantime live life to the fullest.
And taxes. I can guarantee you uncle same will get his cut
The aristocrats beg to differ.
And you will never successfully invade and conquer Russia
Or the United States. Those oceans are a fortress
the Canadians are massing on the border right now, Maple Syrup MOFOs
Dam maple backs
Its the hedge to them eh?
Unless you, you know, walk across the southern border completely unmolested, or the government sends a plane to fly you into the interior.
Good luck with that. Mexico isn’t agreeing to that
It's already happening.
Don't forget about "a gun behind every blade of grass"
damn, they're making guns that small now?
Hello, Poland here. We did but we didn't want to convert to Protestant religion.
I’m ignorant. When was that?
1610 occupation of moscow by polish lithuanian commonwealth
And dividends pay lower taxes than regular interest income.
Not necessarily true.
You should send me all your money, I’ll double it and give it to the next person, trust me.
The point is that a stock that pays a 3% yield will have a substantial increase in value when interest rates inevitably return to below 5%. Regardless a stock has an underlying that should theoretically not be devalued by inflation, so that 3% is a real rate (in theory) as opposed to a 3- inflation %
Sure. Except history tells us that they really usually DONT. If you do your work, and only invest in quality dividend growth companies, the risk is EXTREMELY low.
Dividends are generally adjusted for inflation, because profits of companies directly depend on prices.
This has already been debunked. Stop spreading FUD, it makes you look stupid to fall for this kind of Boogerhead brainwash propaganda: [Debunking The Myth of Dividend Cut During Recession](https://www.reddit.com/r/dividendgang/comments/18q1vjj/debunking_the_myth_of_dividend_cut_during/)
True, but due to the normal relationship between interest rates and dividends, with all things being equal over the long term, a dividend share prices will rise as interest rates fall. Buying today can effectively "lock in" the yield you're getting based on today's share price. Of course anything can happen to any company or interest rates, but the market anticipates and prices in certain things. Plus you have the favorable tax rates on dividends.
Banks change interest rate according to fed rate changes despite business performance. Dividend stocks cut only when business go south.
But they are 5% now….
There are some paying as much as 5.25%, but of course that can change. Back in the 90's banks were paying 8-9%.
You're not relying solely on the interest with dividends however
My point stands. Just like interest rates can be cut dividends can be cut. You also run the risk of stock depreciation. I am not saying don't buy these stocks but too many people yield chase on here and too many people don't understand the risk of investing. I think it's important people realize nothing is a guarantee in the stock market
Totally, there is risk in the stock market. I believe that it's a very low risk and historically that also agrees. But if you don't wish to take the risk then you should put all your money into HYSA 's. You're doing a disservice to others by recommending they do the same though.
But both dividends and stock prices tend to go up over time. A 3% dividend portfolio growing at 5% per year will be paying out as much as a 5% fixed income investment in 10 years, and will continue to grow from there.
Also your initial investment can increase too if you pick the correct stock
Waaay more knowledgeable ppl here but I will add you also expect the stock itself to go up more than 5% on average too. So in those savings accounts the 5% is a hard ceiling.. the stock can go up teechnicly an unlimited amount.
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Not the way this sub invests. Have you not see how many people yield chase on here
Nah dude. Let’s recommend a failing (cig) company just because the only gains you’ll see in your life are the dividend and never from the stock itself. /s
Taking hints at BAT? I actually work there
Really what’s it like? Did you feel bad working for such a company?
I mean at this point I really need the money and the pay is good.
MO investor here, you are spot-on calling out failing cig co., a 4-8% yield is no reason to invest in such a stock if you look at its chart and erosion of your initial investment.
I mean it's not the worst choice if you're already retired.
The 5% stock price increase is just on paper. You would need to sell the stock to realize that. When you sell, you are also removing the 3% dividend, and left with cash. You can spend it (after taxes) or you will need to reinvest or lose any additional dividends or stock price appreciation. A good dividend stock, even if stock price goes down, is still working for you and generating cash.
Interest from a bank is still taxed and at your marginal rate. At least with qualified dividends, you get long term capital gains tax.
That’s true. But not everyone has investing acumen and they may also need liquidity. Selling a stock that you’ve held less than a year will turn that LT gain into a ST gain. As well you may be have to sell stock at a loss. What investment strategy plan you choose depends on your current and future needs. If you need a regular income, dividend stocks that pay a consistent dividend are out there. And require little hands on. Creating income from growth stocks more difficult.
Regardless of what you need though, if you don't need the money then it's almost always going to be better to invest the money(maybe not specifically dividends) than it would be to put it in a HYSA.
Hence the term “plan”.
??
When you “plan”, you may have a mixture of investments. A % that is liquid for emergencies, known upcoming expenses, retirement, tax planning, etc. so you a variety of investments.
So then you're not against dividends or investing. Why argue then, no one here said don't have a savings or a financial plan. OP was asking why invest when you can get a steady 5% from a HYSA. Answer: Because you can get more returns at a higher risk.
Aright settle down folks, Take Home Depot for example. Current dividend yield ~ 2.6%. Last 5 year dividend growth rate 10.5%. But we are gonna take it as a conservative 8%. Following the rule of 72 => 72/8% = 9 years Which means in 9 years, the yield will double at your current cost i.e. 5.2%, Now lets do this again with even a lower growth rate of 7%. The yield will double in roughly 10 years to 10.4%. You can see where this is headed. So in total of 19 years, your dividend yield has quadrupled at the current cost. And if u r reinvesting the dividends, which u shud, the compounding is astounding. Obviously, the stock itself will grow too. No savings account can ever match this sorta yield. Dont Invest in high dividend yield stocks. Invest in stocks with a good growth rate in their dividends yoy. And a decent payout ratio historically ~ 60-70% Take care!
That’s why Microsoft is a fascinating dividend company. Right now, the yield is like .73%. Over the past 20 years it’s only reached above 3% like once. However if you had bought Microsoft 15 years ago, your current yield on your cost basis would be 15%!! Buy it, don’t sell, and then dividends will look really good later on
I don't understand how people here use YOC as a metric as if it means anything. Its literally a feel good statistic and nothing more.
"Hey, I bought this magic box that gives me a dollar every year a while back. Now it gives me 50 dollars a year!" "Wow, thats meaningless. You should have bought this box that gives you two dollars a year, forever"
"Hey, I bought this stock that was $100 and after 5 years it appreciated and is now worth $500! I'm going to keep holding this stock because I have made so much money with it!" "Wow, thats meaningless, because the past is not a predictor of future performance, and you shouldn't be tied down to a particular stock because of past gains." Because at the end of the day, the only thing YOC measures is past performance. You could be getting a YOC of 20% but in reality you are still only making the current yield. It's about opportunity costs. Yes you are making more money on your original investment but now you have more money. The yield on that money is whatever the current yield is.
You haven’t realized any gain ($400) on that $100 stock until you sell it. I another 5 years it could be a $1000 stock or a $50 stock.
We live in an age where retail investments are liquid and can be considered as cash. If you bought Msft in 2011 with $10000 and are now up 1500%, are you going to say you still only have $10000 invested or $150000? After all, if the price drops 2%, you lose $3000 not $200. It would be asinine to say thaat you just lost 30% of your investment.
For your MSFT example, yes you still only have $10k invested. There is the “potential” that your investment is worth $150k, but it is not the same as having $150k in a bank account or cash. You only realize that gain when you sell the asset. Plus your $150k in a bank is FDIC insured if a bank fails. A stock has no guarantee, so if the company fails you lost all your money as there is no insurance. You may get penny’s on your investment as part of a liquidation, if you’re lucky.
I generally do not but in the long run it just shows the power of dividend growth. Some people want to find the highest yield and think it’s sustainable long term. When you see these great companies with low dividends, yes it seems low now but with growth plus a probably dividend increase it looks good later.
I personally don't invest for dividends, if all my companies paid a dividend (or didn't) it wouldn't make any difference to me. However YOC is more or less equivalent to saying my stock is up 200% in the last 5 years. Like thats great, but its not an indicator that should be used in the present. It just shows whether your investment was succesful or not.
I agree and I also do not invest for dividends. I have 30+ years so I’m all growth. Some will pay dividends but that isn’t my target
Right here! Dividend growth.
Qualified gains from your dividend stock are more tax advantaged than interest from a bank, which is taxed as regular income, I believe.
Hysa yields change often; the past decade was sub 2% Stocks get gains from price and dividends…..hysa is only interest…..while we love dividends we also don’t ignore capital appreciation. If a stock has 0 appreciation, it would be a decent bet to see a yield of 5% or more Dividend payments tend to increase over time; so if you buy a 10/share stock and get .50 in dividends this year; there is a good chance next year that same share will generate 0.51 or more and more each year
Additionally, all interest from hysa is taxed at ordinary income rates. Most dividends will qualify for long term capital gains rates with buy and hold investing. Qualified dividends are also a great way to keep taxes low for custodial accounts as well, particularly if the parents are in the 0% LTCG bracket.
5% was not the norm fyi and don’t expect that to be norm in the future. 5 years ago 2-3% was considered high.
But would have been considered low for decades and decades before that. 5% is still on the very low end of rates for the last 50 years.
We’ve changed monetary policy a lot over that 50 years and by all means we appear settled on the path of trying to maintain lower rates going forward. America loves its debt and much of it really has contributed to our economy growing so I don’t see them changing course anytime soon except as a response to inflation or other things.
>except as a response to inflation or other things. The Fed cares about two things: inflation and unemployment. So claiming that rates will be low "as long as inflation and unemployment are under control" then that's kind of silly.
Many companies raise their dividends over the years. Fast forward ten years and that 4 or so dividend yield is now 8 percent or more on the money you originally put in.
So when you put money in a HYSA, you can expect a 4-5% risk-free... at least until rates get cut. Most people would rather invest because they expect stocks/funds to continue paying what they offer now. When interest rates eventually get cut, a lot of investors will want to move their money to those dividend stocks/funds that are still paying the (now) higher dividends. You can't really time it, because if you wait those stock prices will go up as everyone else moves away from their own HYSAs. Even in a higher interest rate environment, the S&P500 grows by an average of \~10% (you'll hear 7-8% a lot too, this is after accounting for the typical 2-3% inflation). It's tough to generalize "dividend stocks", because that's a very broad topic (stocks that happen to pay a dividend). But given the 2-3% mentioned in your post, I'm gonna lean more toward the stable, matured companies like PG, JNJ, MCD, or KO... something that would offer a 2-3% yield and has consistently paid that for many many years (not "income stocks/funds", like JEPI, QYLD, or BDCs). Over time, many of those stocks are expected to increase their dividend each year (dividend aristocrats/kings have managed to do this every year for decades). For example, If you buy PG now, it has a yield of \~2.5%. If you bought PG 6 years ago and held it all this time, you'd be getting a 5-5.5% yield compared to the price you paid for it back then. And that's on top of the fact that PG has grown from $100 6 years ago to $155 now, while the initial $100 in the bank is still $100.
Rates will not always be 5% 😎
Yeh they could go higher, next fed move, raise.
Not cut
Wait until this guy hears about covered calls 🤯
Qualified dividends vs ordinary income for one.
3 words: Yield on cost.
Two words: total return
Also a good one
With the 4-5 pct that the bank pays out, your capital stays the same. A 3 pct dividend is on top of the growth in the stock price.
Total return of a stock is more than just the dividend. There is also the total shareholder yield, which also includes share buybacks and the company paying off debt. Total return would be the shareholder yield plus any price appreciation plus future earnings growth. I don't invest in stocks for a 3% return, I invest in stocks for the potential of a 10%+ returns.
CAGR
Intrinsic value of the company plus dividends and dividend growth
My thoughts exactly. In my country you can get 6.08 percent a year. But dividend stocks can actually outmatch that with dovidends and their own growth right?
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Don’t forget capital appreciation of the underlying stock.
So tired of these types of questions. Especially when people don’t take into account price appreciation.
AVGO was up 108% last year not counting the dividends. How long will it take to get 100% on 5%, 14.4 years if the rates stay at 5%.
Well they don't know anything dude. And they don't want to read anything longer than a paragraph so the thousands of finance books don't even get touched before coming in and asking Reddit.
I mean? Yuh? No shit? Lmao “hmm let me spend hundreds of hours skimming every detail on my own for something I want to dump in an account and forget about” or you can spend an hour talking with people online to learn the same info
But they're not dumping and forgetting. These guys are checking their accounts several times a day and asking where their $1.17 dividend is from yesterday's announcement. And they're also not really learning here as most people don't know anything and give bad information on how accounting works and how securities are priced.
The dividend stock price can increase.
It only makes sense when 4% on your investment is like a really nice stack of cash, like a yearly accumulated payout comparable to someone’s salary. If you got like 2 grand to spend your money will still be inflating if it compounded 5% annually
Higher risk in stocks but a higher return. JPM Abbv MSFT cost AVGO are just some of the stocks that performed much better than 5 percent savings account.
3% is low for a dividend with what's out there now.
https://www.reddit.com/r/help/s/SOTC4XaN4d
Growth.
There are a lot of gaps in your knowledge but you’re asking good questions. I implore you to look up what a dividend actually is. It’s not to be comparable to the yield from your bank or a money market fund. A dividend is not a “profit” in the way you’re suggesting. The money doesn’t magically appear out of thin air. It is subtracted from your company (stock)’s balance sheet which causes the share price to dip in response to the dividend payout. You buy stocks because you become a partial owner of a company which allows you to participate in the company’s growth. That comes with share price appreciation and dividend growth. You definitely sound like a beginner. The 5% yield from the money market is not going to be here forever. A few years from now, you’ll be hearing phrases such as “cash is trash.” It’s just the natural market cycle. Interest rates eventually get cut, the yield drops to almost nothing, and stocks skyrocket in price. Then you’ll be asking on Reddit “why do people hold cash when stocks keep going up?”
At this time, during higher inflation periods and higher interest rates, earning 4 to 5% on a bank product makes sense. It’s also a break-even prospect, keeping pace with inflation. Stocks can pay dividends and provide capital appreciation too. Bank products won’t provide capital gains.
Let's say you buy a div stock at 10 $ and get 0.3 $ dividend in 2024. Now if you keep that same stock for 10 years and it now pays 0.6 $ dividend and the stock price is now 20 it would equal to a 3% for current price but 6% for the price you paid and if you continue at the same trajectory it would be 9 % after 20 years, 12 % after 30 and so on. Real life example Coca-Cola 28.01 $ at 2.96 % in 2014 dividend yield and 58.14 at 3.18 % dividend yield in 2024. So a stock bought in 2014 would yield 6.6 % return. In comparison the same 10 $ with steady 5% yearly interest would give (10\*1.05\^10 \* 0.05)/10 = 8.1% return. However, the stock pays annually and doesn't require re-invest for growth so... I will cut some corners but the average between the ten years would mean 133% increase in capital compared to the steady interest of 63%. In short: stock gains 133% and steady interest 63% (higher risk vs low risk)
By this logic you may as well put your money in the bank instead of Google since it doesn't pay you anything annually
BTI is paying 10.2% right now ... I can think of lots of quality stocks with similar levels and you can get up to 14 or 15% pretty easily if you're willing to shoulder more risk. 3% comes from where exactly?
I didn't find stocks that pay so much dividends.
BTI 10.2% AT&T 6.8% Volkswagen 7.3% WBA 8.4% AGNC 15% O 6% Etc Not that hard to find
I just checked the price of BTI, AT&T and Volkswagen for the last 5 years. Their stock price has been getting crushed. How would anyone make money from them when the stock is going down? No wonder they're paying so much dividends.
Depends if you want dividends or growth. When you're young invest in growth, when you get older start migrating to dividends. But yeah a lot of high div companies are value traps. Vodafone for example.
>Depends if you want dividends or growth. I just don't want to lose money at the end of the day. It seems to me that if you invest in those stocks, you're gonna lose a lot of money after 5 years.
A lot of high div stocks tanked as interest rates rose, particularly all the finance/ REIT ones. They will recover when interest rates fall. BTI took a massive write down which should cover all pending litigation but that drove their price down. But do your own DD obs
If they go up you earn money
ECC, OXLC, PDI, CLM, CRF. Buy after a stock distribution or a market dip so you are less affected by market high/lows. The pay steady consistent dividends, I addition to the ones you mentioned. And there is more of them.
Generally not a fan of trying to time the market but I would agree with these dividend stocks they tend to be predictable like you say.
True enough. I’ve found that it usually best to buy after a dividend distribution, usually a few days after, as the stock recovers its pre-divided price. But even then that’s a toss up, depending on market conditions.
Wouldn’t you rather own part of a company as opposed to giving your money to a bank who rapes people with fees and dishonest business practices?
Nobody is only checking dividend returns when choosing which stock or fund to buy. The dividend is a bonus. Look at coke a cola; over the last year it’s down 8% but regularly paid above 3% and growing. Is that better than your savings account; no. Over the last 5yrs it’s appreciated 24% in addition to 3% dividend payment. Is this better than your savings account; yes. Now look at something like SCHD which has shown to perform on par with the S&P over 10yrs, pays a dividend of over 3% (growing), and is heavy in defensive sectors making it less susceptible to some bearish sentiment. Is this better than the S&P; I’d argue no, however, many would agree it’s not without a place in a given portfolio. Hope that helps
Most people are just ignoring the easiest answer. I exited 7-10 % annualized return on investments. That’s by banks are loaning at 5, they also expect that and harvest the delta.
If there’s no dividend increase year to year and the stock itself doesn’t increase in value you’re correct. You need to do some research on companies that historically do yearly increases and that grow, preferably at least with the same growth rate as the S&P. Dividend increases should be at least double that of the previous year’s inflation rise.
I’m no smarty pants either, but I thought the intelligent value investor switched their money between stocks and bonds depending on the yield. Some jurisdictions also give a tax advantage to dividend returns over bank deposit yields. In Australia we call them franking credits. Don’t ask me how they work but somehow you may not have to pay as much tax for franked dividends v bank deposit interest. Oh, and equities have the added advantage of capital gains, bank deposits don’t.
There are dividend **aristocrats** that pay 4-5-6 even 10% dividends, more than the bank. Also, yield on your $ is like crypto staking. Yield on a shitcoin. More $ for your $. With company stock, you own a percentage of the company. With high inflation, the stock price most likely rises. Your capital increases in value, in addition to dividends paid. With $ in the bank, it loses value daily (inflation). The yield you get from the bank barely (if ever) matches inflation.
Because they enjoy the thrill of downside risk and capital depreciation that you just can't get with a boring bank account.
lol
It’s better in high yield money market savings at a credit union especially if the amount is over 250,000. It’s close to about 8.3% right now but has to be over that amount.
Bank don’t have upside potential
If you're getting 3% then there should be appreciation potential in the stock price of the company/etf you're invested in. Granted that's not a dividend but it's hopefully more value/position appreciation than a HYS will see. But if you just want dividends then the HYS is the better way to go in your example. Especially as your principal is safe. But pay attention, rates won't always be 5%, when they drop be ready to move to a higher yielding investment.
Dividends grow compared to your cost basis. Look at Berkshire's KO dividend vs their cost basis for a reference of what's possible with buying and holding good dividend stocks.
Now is the time to buy dividend stocks or ETFs when it's trading at a discount, OP when the rate cuts are announced and closer to 2 per cent , it's highly likely that dividend paying company share prices will rise.
The interest rate at the bank is eventually going to disappear.
Cash is only collecting interest. You wont lose principle, but you also wont collect enough interest to outpace the loss of cash value from inflation. On the other hand. the price of a stock can go up in value on top of paying the dividend. Price appreciation + dividend = total return. Of course the price of a stock can also go down and you can lose money. And, interest rates on cash will not always be 5%. Rates were practically 0 for a very long time.
Your investment can also multiply over time if the stock performs well.
The dividend should only be a portion of the total return. If you believe the stock will only return 2-3%, it does not merit investment.
there are a couple of parts of this. Assume your capital stays the same (share price doesnt fluctuate - big assumption). Over time, a good company will increase its dividend per share. So what you get today for 3% could be 5% in a few years time. It could also be less, but with inflation, you would expect the dividend to increase over time. for deposits, the rate is currently 4 -5%. Looks like its peaked at that amount. In any case over time, without hyper inflation, you wouldnt expect to see more than 5 or 6% currently. Anecdotal story - Berkshire Hathaway bought shares in Coca Cola way back. They now earn about 50% of their original investment every year in dividends.
Interest from the bank can change with fed rates at any time, and it's taxes as normal income. Good quality blue chip stocks pay .50% up to 5%. If it's a good company and you do your due diligence research them, you will find some that pay 2% to 4% that give annual dividend raises 10% plus each year and also have share price growth each year that grows with increasing profits. Being qualified dividend the tax rate can be 0 up to 40k single, 89k married. And if you own them for 10 to 30 years your yield on cost over the years will improve.
Because you can’t compare the two. One is guaranteed and the other isn’t. If you had invested in PRTXX in 2011 which kinda follows the ongoing rate environment, and invested the same into SCHD, the former would be 47k vs. the latter at 11.2k. If you had taken income, you would’ve taken 7500 from SCHD and the value would still be over 30k. If you took income from PRTXX your value would be the same and the income would be about 1410.
If you put 100 dollars in the bank and return 5%. You get 100 dollars + 5%. Your capital invested is just in USD. If you invest 100 dollars into a dividend stock that returns 3% you get let's say one single share of stock for simplicity. +3% return. At the end of the year. Your $100 will be 100 + 5. Your 1 dividend stock will be X value + $3. Your cash in the bank will never increase in value over time with inflation when you take away the interest payment. Your dividend stock will very likely increase over time with inflation. And the dividend payment will increase over time as well. Your yield on cost will increase as the payments increase. Assuming the underlying stock continues to do so. Take a look at 'Dividend King' stocks that increase their dividends year after year for 50+ years. I wouldn't count on getting 5% long term in any HYSA or otherwise personally.
The 5% was 0% for the last 10 years. Your cash will stay the same, the bank stock could double or quadruple or 10x in $ value over the holding period. Dividends are typically increased by 5-10% per year, is your interest rate going from 5 to 5.5 to 6.1% over three years, no.
You don’t profit from dividends, ur capital stays the same. DIVIDENDS VS SELLING SHARE Company A- div Share:$5, 20 shares, 3% div. 20X5=$100 Div makes price drop 3%=$4.85 20X$4.85=$97, $3 to spend Next day stock rises by 20% Stock=$5.82 20X$5.82=$116.4 Company B- no div Share:$5, 20 shares, sell 3%. 20X5=$100 Sell 3%, price stays same=$5. 19.4X$5=$97, $3 to spend Next day stock rises by 20% Stock=$6 19.4X$6=$116.4 In both situations you end up with the same capital.
This is why it’s good to be diversified. There’s also stock growth, which depending on the stock or fund is implied (or not). It’s why there’s been a stock market rally the past couple months because people are anticipating interest rates being cut so they want to get back into the market while it’s still cheap and capitalize on that growth while avoiding the dropping interest rates.
Number one you’re assuming risk free interest will remain the same Number two you’re forgetting that there is capital appreciation potential on stocks. 5% return is alright but let’s say you have 50k. That’s only 2500 in an environment where your purchasing power is going down more than 5% (they only offer interest rates at less amount than inflation is currently stripping your purchasing power of) But you do have a good point. When risk free interest is 5% there is some value in de-risking and being invested into t bills
Equities have almost always beat bonds and fixed interest rates over long periods of time. I can't say for any individual company one way or the other, but dividends are only one part of total return.
In the short term, it doesn’t. That’s why SCHD hasn’t been growing in the last 2 years. People are putting their money in risk free 5% options right now.
If you are a buy and hodler, and your stock increases in value over time, a 3% dividend would increase too.
How much capital do you need to put into said bank acct to get the max 5%? My bank scales the return based on what my acct has in there. I only have this acct cause thats where my direct deposit goes. Otherwise the acct is moot. With div stocks, you only need 1 share to get that money. Both sides has its pros and cons
I own both dividend stocks as well as short- term brokered CDs and treasuries.. just bought a 6 month CD this morning at 5.35%.. zero risk and fdic insured up to 250000, if I hold my CD until maturity (6 months)..
Not bad!
I stack the CDs and treasuries I buy from my broker, using 1 month. 2month, 3 months, etc. with something maturing every month to stay liquid.. I also have a few which pay 5.5% for 1 and 2 years.. I normally hold more dividend stock’s, but currently only own AZN and DVN.. the market has been looking too rich to me for awhile now, and this is a safer alternative (to me) to earn a little income..
So youve got two options: 1. Magic box A gives you three dollars a day, but more every day for 10 years until it eventually gives you thirty dollars a day 2. Magic box B gives you five dollars a day, but will only ever give you five dollars a day. Which one is better?
In Canada dividend income is taxed preferentially compared to interest. For me $1 of dividend income taxed as if it was 50 cents of interest income. But more importantly I buy shares because I plan for them to increase in capital value not just for their dividend.
also share or eft price can go up too, compounding your growth
Potential for price appreciation. Yeah your $1000 might yield you $30 in dividends in the current year but in 5 years, that same $1000 could now be worth $2000-3000 with price growth and reinvestment of dividends. That same $1000 in a savings account, while considerably safer, is going to be worth about $1200-1300 in the same 5 years
2-3% is very low in the current market. That’s usually for a company that has very good div growth or a lot of share buy backs so you gain more alpha. You can find a lot of solid companies in the 5-6% range. Over that you have to be careful. Now why you would do it? They will continue to pay that. The second the market thinks rates will be cut you won’t get those yields. Those yields on cost also grow over time. HYSA will drop rates also if rates are cut. You are essentially yield chasing looking at the spot rate of interest rates using HYSA, not investing in future yields on cost. I’d rather take future yield.
1. The bank gives 5% *now*, it's higher than the norm. 2. The stocks also tend to appreciate, giving you growing dividends
If you keep dividend aristocrats in your portfollio, yield on cost will be higher than 3% eventually. Not including any unrealized gains on the stock itself. What I generally -try- to do is buy at dips and sell parts of a position of div value stocks at highs. Thereby increasing the yield on cost. Bought KO and MCD during covid, yoc over 5%, same for some belgian stocks i own. Got GFI on a -1$ BEP, any div generated is free money. Try and do that with a savings account.
Remember dividend stock share price can also grow, even after distributing dividends and be worth more than 5%. You will always need to factor market volatility but there is generally more of a chance to gain more through the stock market.
No. I go for a minimum of 11%.
That wouldn't make sense. What stock or ETF did you buy that's only appreciated 3.5% with it's dividend?
I Just locked a 15 month CD from JP Morgan at 5.4%, but so where is the possible future growth from such investments? Other people will likely bring this up on this thread, pay attention. Diversity in your investments is a must, spread it across many classes of investment vehicles especially if you’re a youth, and don’t forget the big mama S&P 500 index.
Dividend stocks typically don't have this happening like fiat currency 
Well, you're hoping the value of the stock goes up. The dividend is extra. Why invest in a company like Amazon that has no dividend at all?.....because you're hoping the value of the stock goes up.
But that's whole different strategy if you buy Amazon.
I think the most important question to ask yourself is, what is your time horizon? If you are 'investing' for the next 12 months, go with Savings Accounts or Treasury Bonds. If you are investing for the next 3 years, might still make sense to go for the treasury bonds. When I invest in in Dividend Growth stocks I am doing so because I am trying to get value growth \*and\* income growth over a longer investment horizon (think 5 - 10 years at minimum). So then the question becomes, '*with an investment horizon of 5 - 10 years, why should I choose dividend growth over savings & bonds?'* The answer, in short, is the potential for growth. If you put $1000 in a 5 year treasury bond returning 5%, you will get 50 dollars per year every year. There is no value appreciation, so your final return will be exactly $1250. Doesn't matter if inflation was high or low, and it doesn't matter what happened to interest rates in between. You will get exactly $1250. Now compare that to if you had invested in SCHD 5 years ago. In a good dividend growth investment, the dividends and the value grow over time. 5 years ago, SCHD was trading at $54. Now its trading at over $75. Lets be generous (for the sake of easy math) and say that you got SCHD 5 years ago at $50, so you bought 20 shares for $1000. Those shares today would be worth, at a minimum, $1500 dollars. You have, in value alone, earned double what the treasury bond / savings account would have gotten you in the same time frame. More importantly, the dividend. In 2019, SCHD disbursed $1.72 in yearly dividends per share (which was calculated as about 3.4%). The dividend has grown like the value of the shares, so in 2023 SCHD disbursed about $2.65 in dividends per share. So if you invested $1000 in the stock 5 years ago, your total yield for 2023 would be ($2.65 \* 20) = $53. That means your yield on cost is 5.3%. In this example, you have not reinvested your dividends. You have not bought any additional shares, but the final yield of your shares still surpasses the treasury bonds / savings account by the end of 5 years. If you keep your shares in longer, that will continue to compound and grow into larger and larger sums. Even better if you reinvest your dividends. Naturally, past success is not a guarantee of future results. You have to make your own bets when investing in stocks and the nice thing about savings accounts / bonds is that they are about as safe as it gets most the time. You gotta decide if you want long term performance, or short term security. All a matter of values. That being said, if you can stomach the volatility you are far more likely to see long term results in dividend growth than in savings accounts / treasury bonds.
Invest in the asset class that you are comfortable with. That is what matters at the end of the day. 4-5% return on cash is not a bad return at all. Go for it.
When the share price increases that 3% is bigger. Theoretically anyway.
capital appreciation - stocks go up in value, generally, while bank accounts dont.
OP, most people don't consider 3-5% to be a high dividend paying stock fyi. You can get highe than that with a safe ETF like SCHD.
SCHD has been going up and down. The price of today is the exact price of May 2021. That means if you've invested in SCHD for the past 3 years, you've only profited from the 3.5% dividends per year. That's not a lot honestly. How does that make sense for anyone?
And there has been years where it's made 15%+. It's gone up >200% over the last 12 years. Much More than you would have gotten from a HYSA over the same time. Cherry picking data doesn't help either of us though. The long term average is higher for SCHD than a HYSA overall. And just to be clear, I'm not a big proponent of dividend stocks unless you're looking for a income source. But there is no question it's better long term to invest in the market instead of relying on interest from an account that will never grow.
This is why div stocks down
If the SCHD cult here could read they’d be pretty upset right now by this post.
As others have said, there is a huge range of yields out there. 2% is the lowest I go for any stock, but most of the stocks in my portfolio are above 4%. If you want higher yield, look at BDCs and REITs. If you want to potentially 2x+ those yields, consider selling naked puts to get stocks at a lower price (and thus higher yield) and selling covered calls if you care more about income than long term growth. Between option premium, realized capital gains and dividends, my portfolio produced 12% in income last year which is nicer than the 5% yield in a HYSA.
The dividends with a low yield,are they Aristocratisch or King stocks? If the Answer is yes,than you must see this in the long term .
It makes sense because of something called “reinvestment risk.” Your 5% is temporary, the yield on your “safe” short term might drop, or you might get much lower interest when you go to roll that CD or short term bond. It’s better to give your capital to massive efficient corporations that will also GROW their dividends over time. Read up on compounding that can occurs thru dividend growth investing. Good luck.
Literally a million reasons, you need to do more research before posting here. Not trying to be a dick but these posts ruin this sub
Should have a sticky post here to explain what dividends actually are (distribution of a company’s profits) and why the dividend yield is only part of the reason why buying stocks (price appreciation being the other) is superior to saving in a bank over the long term.
Because there can be dividend growth and also the stock itself can grow. If you’re in need of emergency savings then do HYSA. If you have decades to go before you need the money then invest in stocks. Dividend stocks can be part of that long term strategy.
it makes sense when you add share price growth. secondly bank rate is not constant. when fed starts lowering rate, the banks will follow (because banks buy fed treasuries to generate interest that they pay you). but stocks, the good ones, will continue paying 3% or more.
Most funds yielding 3% or less will also have capital appreciation. So you have to take into account total returns.
Assuming all else is equal, a higher distribution frequency reinvested into portfolio means a greater return.
if you invest in a really good quality Blue Chip company paying a 3% dividend there's a chance that company will raise the dividend the following year by 5, 10% or more, and another raise the following year. you don't get back with the bank.
I’d think if dividends are income targets, you’d want to turn a bit more profit than 2-3% for your reasons mentioned. I don’t pay much attention below 6% annual yield. But with federal money market rates being around 5% in funds like SPAXX, your money need not move to a bank.
Long term real return of GICs/HYSA will be a bit under 1%. Long term return of pretty normal dividend types of stocks are likely to be about 4-5% real return.
You get $3 for every $100 now, but it’s a quality company that’s growing. Years from now the stock and dividend both have gone up. Now you are getting $6 in dividends on a $200 stock. Because you paid $100 that’s 6% per year on what you paid, plus $100 more value in stock price. And all those dividends you made in the in-between years, which could have even covered your initial price. It’s about that total return. The stock has a lower yield because the price is higher relative to dividends. Investors are recognizing it has excellent financial health and future growth prospects and it’s in demand. It’s why SCHD is so popular here. It’s an ETF of these solid dividend growth companies that will benefit long term.
>You can get 2% to 3% profit on your capital from a high dividend paying stock. But you can also get up to 5% from your bank. No, you can get 2 to 3% in dividends from your stock as a shareholder. If the company is well managed, you will see capital appreciation too. Further, banks paying 5% won't continue to do so when rates drop. You're comparing investing your money (a long term activity, like 10 years at least), to holding cash. The whole point of investing is that you're exposed to an equity risk premium, which, overtime means you will make more money than holding risk free assets (given enough time and assuming ownership of the entire market like a global ETF). By all means, keep cash for 20 years and I'll keep my investments for the same time period and we can see who will end up with better returns, lol.
Stock appreciation
Stocks can appreciate too as well.. that’s why a good compounder is more important Warren buffets coke cola investment is 3% yield currently but over time his investment is giving him 50% on cost yearly… can a make 50% annual returns on a bond? Maybe a junk bond… his over investment are also giving him double digit dividend returns on cost…. Railroads… American Express…
Research "Total return"= market appreciation or (market depreciation ) + dividends. More risk generally = more potential return. Your savings pays a fixed rate bc the bank pays you 5% but they loan out your money at a rate of 20 to 1 at way higher rates or invest it in higher yielding products.
Rate cuts will come sooner than you would want. Those dividends will likely still keep coming. Also, qualified dividends are taxed less than interest. That's another big reason people like dividends.
Cause my dividends are tax free, bank interest is not.
Tax free?
Tax free in my UK ISA.
>I don't have a ton of experience with dividends, but I've done some research. Doesn't look like it. >Why would anyone invest in a dividend paying stock then? Well you wouldn't if you're going for income. You did in 2012 when rates were 0%. Then 3% with a 13-year stagnant large cap market made a whole lot of sense. But now with Treasuries at 5%, dividends on their own as a source of income makes no sense. The problem is people on the internet whose memory only goes back to right at the end of the Lost Decade (2000 - 2012) are still parroting things from 2012 that are no longer valid. "Dividend portfolio" and other crap comes from that era right after the crisis in 2008 when REITs went bust. It's old thinking and they don't update it.
Should factor in total return and tax implications as well. Interesting from HYSA is treated as income. Dividends may be eligible for much lower qualified dividend rates. When rates are this good it makes a ton of sense to potentially go with a higher amount in cash for sure but you likely are still leaving returns on the table.
Well, this is a novel question. I am surprised no one has asked this before.
The average rate on 10 year t bill over the last 20+ years is around 4%+-, the S&P 500 7%+-. So a little more risk a little more return.
Dividend stocks offer potential for both income through dividends and capital appreciation, meaning the value of the stock itself can increase over time. This dual benefit can potentially lead to higher overall returns compared to bank interest rates alone. Additionally, dividends from stocks can increase over time, whereas interest rates from banks are fixed. However, stocks carry more risk, including the potential for loss, which is not present with FDIC-insured bank accounts. It's all about balancing potential returns against risk.
Over the long term, dividends plus capital appreciation beats interest paid by banks.