Dividend investing is a popular strategy for generating passive income and building long-term wealth. However, when choosing dividend stocks, we must understand the difference between dividend growth and dividend yield. In this article, we will explain the difference between these two and discuss the pros and cons of each.
Dividend Yield
The dividend yield is the annual dividend payout of a stock divided by its current share price.
Therefore a high yield would mean a higher payout per dollar invested. The primary advantage of focusing on dividend yield is, that it provides immediate income. However, high dividend yields may indicate that a company is struggling financially, and the dividend may not be sustainable in the long term, which is generally known as a yield trap. Moreover, companies with high yields may not have much room for future growth.
Dividend Growth
Dividend growth investing focuses on companies that have a track record of consistently increasing their dividends over time. The primary reason to focus on dividend growth investing is that it provides potential long-term dividend growth. Moreover, companies that are able to increase their dividends over time often have a financially more stable and growing business model. However, as they may be focusing on increasing profits over the long term they usually have lower yields than higher-yield stocks and will see the benefit of holding such stock in the longer term.
Dividend Growth or Dividend Yield
If the priority is immediate income then the focus is on yield, if we are building a portfolio for the future then the focus should be on dividend growth. However, I think that even if one is focused on immediate income, the focus should be on a company that has a sustainable business model and is able to increase its payout over time, in part due to the sustainability aspect as well as rising inflation over time.
Disclaimer: I am not a financial advisor, this blog is centered around my opinion and should not be viewed as legal, professional, or financial advice.
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