Whatever age you are, it is never too late or too early to plan for a stable and comfortable retirement. It is smart to look for ways to provide yourself more steady sources of income that can allow for early retirement before you hit your senior years. Aside from getting a job and putting up your own business, one of the ways to earn an income is through investing in companies that pay dividends to their investors. But what is a “dividend?”
It’s simple: when you invest your money in a company to buy stock, you become a shareholder. Now, when that company starts raking in earnings, you will get a portion of the profit which is called a dividend.
Dividends come in two forms: a cash dividend and a stock dividend. Getting your share of the profit in cash form sounds good, but a dividend stock can also help you secure a more steady stream of income.
• Earn money with dividend stocks
There are two ways to acquire income with dividend stocks. The first one is when the value of the shares in the company rises. The price of your shares, some of which you acquired as dividend stocks, will go up as well. The more shares that are in your name, the more money you will have.
Secondly, dividend stocks will gain you more returns because you are increasing the number of your shares. For example, if you start at one share and gain half a share through dividend stocks, you will have a total of 1.5 shares. In the next payout, you will receive more dividends because your total percentage is higher than before.
• Grow your money exponentially.
Reinvesting your dividends to buy more stocks can grow your initial money at an exponential rate. Many investors take advantage of the power of “compounding” to get a steady stream of income through dividend stocks. This is the process of reinvesting the profits acquired from business to gain more revenue.
Here is an example: imagine that you’ve decided to put up a lemonade stand. Your total bill for the lemons, sugar, plastic cups, paint, and materials for the cart is $50. After a week of selling the lemonade, you have collected a total of $105, minus the initial $50 it cost you to buy the materials. With compounding, you will use your $55 profit to set up another lemonade cart which can also potentially gain another $105 in a week. In another week, you will have four lemonade stands from the two carts’ profits—the growth is exponential.
• Withstand inflation with the value of dividend stocks.
First off, what is inflation? Inflation is the rate at which the prices of goods and services rises, lowering the purchasing power of the currency.
For instance, imagine the cost of the lemonade per ounce goes up. Before, you paid $50 per week to put up and sustain a lemonade cart. Because of inflation, you are forced to take out $25-$75 more in expenses than before. The business can withstand the increase of lemonade cost through profit. As the prices of goods and essential commodities rise, the benefit also has a tendency to grow which means that from the old $105 per week earning of a lemonade cart, it now has a potential to rake in $25 more to cover for the extra cost of lemonade.
Therefore, inflation does more harm to those who chose to take their dividends in the form of cash or dividend funds. The value of their money decreases and their purchasing power becomes limited to inflation.
No one is too late or too early to plan for the future—but it is always better to do it now, and dividend stocks are an excellent way to do it.