Are dividend stocks must in your portfolio

What is a Portfolio in the stock market?
A portfolio in the stock market means a collection of investments like cash, commodities, stocks and bonds, other investments including ETFs (Exchange Traded Funds), Closed-end funds, etc. The core of a portfolio is comprised of mainly stocks, bonds, and cash. Additionally, an individual can put their funds in any asset to generate revenue or returns that will make sure the capital does not erode. Management of a portfolio or seeking the help of a professional financial advisor is the choice of the individual.
There are various types of portfolios like:
Income Portfolio: The type where the more emphasis is on having a steady income from investment. Potential capital appreciation is not the main focus here. Here the investors can have regular dividends instead of price appreciation.
Growth Portfolio: A growth-oriented portfolio invests its money in growth stocks that are in a stage of active growth. These have a huge risk added to the higher returns. It is well known for better returns and high risk so you win a lot or lose a lot.
Value Portfolio: A value portfolio is the one where money is invested in cheap assets (Those whose valuation is cheap or low) and the focus is on a bargain. When the economy is struggling a lot, these investors are in profitable positions after selling these shares in a stable market.
What are Dividend Stocks?
A dividend is a reward that is given to the investors of publicly listed companies. The source of dividend is the company’s net profit and these rewards are in the form of cash, shares or cash equivalent, etc. Moreover, these dividends are decided by the BOD (Board of Directors) of any company by the approval of majority shareholders. Additionally, the company decides on whether to reinvest the profits for growth and expansion or reserve it for the future. Dividend stocks are the stocks that give out a dividend if the company announces it.
Types of Dividend
The dividend that is paid by the company to its shareholders is of different forms. Similarly, there are two major types, those are:
Special Dividend: The type of dividend that is paid on the common stock. There are certain circumstances due to which it is issues like accumulation of great profits over the years. These profits are termed as excess cash that is not needed by the company for immediate future use.
Preferred Dividend: Type of dividend that is issued to a preferred stockholder. It has a certain fixed amount paid every quarter. The type of dividend that is earned on the stocks that are kind of like bonds.
Things to consider for choosing Dividend Stocks
Dividend stocks are defined as the stocks of those companies that are listed publicly offer a regular stream of passive income in form of a dividend to the shareholders.
Things to consider while choosing a dividend stock that is profitable-
A fair track record of the company for offering dividends and paying timely debts
The dividend yield should be 3 to 6%
The minimum dividend payout ratio should be 50%
How do Dividends Work?
Here is a stepwise process of how dividend works from the initial step:
Publicly listed companies generate a good amount of profits and accumulate a significant part of retained earnings.
The company’s management takes the decision on what to do with the retained earnings to reinvest it or distribute it to the shareholders.
Now the board gets approval of the shareholders on the declaration of dividend on the company's shares.
Important dates are announced for dividend declaration.
Shareholder's eligibility is scrutinized for earning dividends.
The dividend is finally paid out to the shareholders.
Benefits of having dividend Stocks in your portfolio
A share of the company’s profits: A dividend is a part of the company’s profit that is paid off in cash or shares to the shareholders of the company. Additionally, fast-growing companies don’t really go for dividend options and they reinvest their profits for growth and expansion. A well-established company that has lower growth aspects is more likely to go for the option of paying off dividends to their shareholders on a regular basis.
To generate passive income: Another benefit of dividends is that they offer you a way to have a Passive income stream. Moreover, with many stocks in the market which also yield over 4%, a dividend stock investor is enabled to construct a portfolio that can generate a huge-sized income stream. Regular cash dividend payments bring a great opportunity to put the compounding power into effect.
Compounding can generate earnings on reinvestment that is done previously of the generated earnings over the time the results can grow. The power of compounding can either make or break a deal for you. The value of the investment and the income derived from it may go up as well as down.
High-level protection during market volatility: The dividend stocks have a small fall as compared to growth stocks during a period of high market volatility. Well-established companies pay dividends so they have strong track records and they are hard to be adversely affected by the market movements. During volatile periods investors run towards this type of stocks to get protection.
Long-term Return Driver: Dividend stocks may seem a better type of investment in the long term and not the short term. Over the long term, dividends make up a considerable portion of total investment returns. Past performance of any stock is not a great guide for knowing its future performance.
Conclusion
To sum it up, Dividend stocks are defined as the stocks of those companies that are listed publicly offer a regular stream of passive income in form of a dividend to the shareholders. There are two types of dividends and various benefits of having dividend stock. The factors that are used to select the best dividend stock should be considered properly. Now choose wisely and earn a lot of profits investing in these stocks.