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In this post I will try to show all the pros and cons for investing in dividend stocks and compare them with interest saving. Which idea can bring more income? How about the risk? What I recommend? Please read article and you will find all the answers.
As I mentioned before – in passive income online ideas – you can use plenty of ideas to create passive income.
To check, how dividend stocks correlates with interest saving, let’s compare them together.
1. Dividend stocks
Lots of investors prefer to buy dividend stocks and receive money using dividend yield. The dividend yield is dividend per share paid divided by the current share price. So, if a company pays $1.00 per share dividend per year and single stock is worth $20, the yield would be 5% (1/20). This is often more than a savings account can offer. But the numbers won’t mean a thing. You need to dig a little further in your calculations. I will try to explain more later.
2. Interests savings
If you prefer safe investing, you can use savings account. You know exactly how much you will earn at the end of the year (e.g 3%). Attention! Banks uses some tricks to take your money out of your pocket – so stay focused. They can charge you extra for card insurance or cost for not using your card at all. Always pick a bank where the interests are high and there are no costs (or they are minimal).
Which method is more profitable?
Let’s pretend we have 10 000 C in cash (C stands for currency – in examples we will use Polish zl, because this is a bit better for me to calculate) . Although I’m not investing in NYSE (only stocks from Polish GPW), so the yield can be a little different from real. I will use the percentage from Polish market. Since 2015 – the yield we can earn from savings decreased dramatically. I remember the times when banks offers 8% of interest over the year. Right now finding something more profitable than 3% a year is really difficult.
1. Interests savings
What this 3% means? Let’s calculate the income. We know that the bank gives you 3% of interests by year. So when we invest 10000 by 1 entire year – we will earn 3% of it = 300C minus tax rate (in Poland 19% from income). So you will earn not 300C, but 300 – 0,19% = 300 – 57 = 243C. It’s not hard to see, that we are earning 2,43% of our income. This is not over. Have in mind that all money has decreasing their value (inflation). Inflation is nothing more than devaluation of currency. Day by day we can buy less stuff for the same money. Please check what you could buy in 2010, and what you can buy now for 100C? Let’s consider this factor as well. I’ve red, that in 2015 inflation is estimated by 1,2%. We can combine the numbers together (2,43% minus 1,2% stands for 1,23%). To be more accurate – you see that we are not making 3% by the year. We are not making 2,43% even. Our real, pure income is 123C (inflation included). This is the real value of income. Do you really want to put 10k to the bank and save just 123C a year?
Overview: Saving 10000C in bank gives you 243C of interests (123C of pure income, including inflation).
2. Dividend stocks
Before investing you need to have some skills and knowledge how stock market works. You also need experience of buying / selling stocks. This knowledge will help you make better decision when and how to buy the stocks. To receive dividend you need to buy stocks not later than usually two business days before the record date. (the ex-dividend date). So you can buy stocks every time you want (when the prices goes down) and wait for your dividend.
If you are not experienced investor, focus on companies that have been stable and paying dividends for a long time.
Let’s use 2 examples from polish stock market – GPW. First you need to do some research. I use for example 2 stocks I observe: KGHM and TAURON.
Example 1 TAURON stock:
Right now one share of TAURON costs 4,54zl (zl is a currency, you can use C for currency if you want). Making a simple calculation you can buy 2198 shares (9997zl, including broker provision 0,019%). OK, we know that the company will give 0,19 zl dividend per share. Let’s check: 0,19 * 2198 = 417,62 C of income minus tax 19% = 417,62 – 79,35 = 338,27C. This is 3,827% of income. Adding 1,2% inflation you will earn for real 2,627%.
Example2 KGHM stock:
I like this company because is big and stable (blue chip). Right now one share costs 114,90 zl. You can buy 86 shares (9990 zl total). This year KGHM recommends 4zl of dividend by share. This is really low dividend (compared from 24 zl 2 years ago). So when you buy this stock today, you can earn 86 *4 = 344 zl. Don’t forget the tax 19%. Income is 344 – 65,36 = 278,64 zl. So, the real value is 2,78%. Including 1,2% of inflation the value is 1,58%, and 158 zl.
Overview: Saving 10000C in dividend stock can bring you 278,64C of interests (158C of pure income, including inflation).
This 2 examples proves, that investing in stocks just for dividend is better idea than saving money into bank account for interests. Sounds good, but please check pros and cons for this method,
- You can buy stock every time you want (when the price goes down). Dividend is payed once, twice a year or every quarter (depends from stock and the market you are in).
- This is a great method for building passive income.
- You can sell stock every time you want (when the price goes up). So you can earn passive income (dividend) and / or active income by selling stocks.
- Investing is more risky than saving money in bank
- You need to get experience and knowledge about stock market
- You need to create stock account.
- You need to take some time to check info about company and read reports.
Dividend stocks are most of the time better than saving money. The only problem you need to face is doing right thing at the time (buy stocks when the price goes down and sell them when it goes up, or wait for dividend). Is it really that simple? Not exactly. Shifting money from bank savings to dividend-paying stocks is an enormous change.
You need to keep in mind that you can lose money investing in bad stocks. Always check the policy of dividend for each company you want to invest money. Dividend is not constant every year. You can be in the position, where you buy stock, but your company wouldn;t give dividend (or dividend is less profitable than last year).
But for me – investing in dividend stocks will be always better that saving them into bank account.
Risks can also be managed by using stocks only for money you can afford to tie up for five years or longer, as stocks don’t often suffer price declines that last that long. But no matter what time you want to keep the stock in your wallet – you need to read all the news, analysis and financial reports involving each stock holding.
Always remember: you put your own money. I’m not here to specifically recommending or not recommending this option for investing. It’s just one route worth considering – one that I’m personally following on a small scale. Depending on your risk tolerance and your life situation, it may not be right for you, and before you make investment decisions, it’s worth talking to a fee-based investment advisory. Dividend stocks works for me for a long time. It should help you too, but first gain some experience and knowledge. When you will be ready – put some amount of money and buy the best stock you know.
If you have questions or problems please reply to this post. I will try to help you 🙂