What Is Dividend Investing? Explained

Passive income has become the buzzword with investors exploring several options to develop a steady flow of income from their investments. One such effective option for generating passive income from mutual funds and the stock market is dividend investing.

What is dividend investing?
Dividend investing is an investment strategy where one invests in dividend-paying stocks and profit sharing with the shareholders. It gives regular income flows, which attract several retirees and income-generating seekers. Companies, which are known for paying regular dividends are well-established firms from specific sectors and are considered financially robust. Dividends are usually paid out in cash to qualified shareholders either monthly, quarterly, or yearly.

Why dividend investing?

Dividends provide a regular income for investors and enhance total returns through stock price appreciation. Nifty 50 companies such as Coal India, Hindustan Zinc, and Infosys are the top dividend-paying companies.

Pros and cons of dividend investment
Dividend investing is considered ideal for those who need steady cash flow rather than aggressive portfolio growth. Analysts believe that dividend-paying stocks provide stability to a portfolio but 'rarely outperform' quality growth stocks.

Pros:
1. Supplemental income: Dividends produce steady flows of cash
2. Steady businesses: Dividend-paying corporations are usually financially stable with predictable earnings
3. Less volatility: Dividend stocks may have relatively less volatility
 

Cons:
1. Limited growth: High-dividend payers might not reinvest much in their business, potentially limiting growth.
2. Lower upside potential: Stability comes with smaller price gains compared to high-growth stocks.
3. Tax implications
4. Dividends risk: Not guaranteed and may be reduced or even discontinued in times of financial stress