Dividend stocks are stocks that give investors a periodic and steady cash return on their investments. The value of such stocks lies in their reliability. Compared to equity stocks that can fluctuate greatly in value over the short-term, dividend stocks are more stable and can be a source of recurring cash for the shareholder over the long-term. Often, dividend stocks are offered by mature, well-established companies that have moved beyond their high growth phase and would prefer paying out a portion of their profits as cash dividends to shareholders, rather than re-investing it in the company. As a result, investing in dividend stocks has long been considered a safe haven for those looking for long-term returns from their stock portfolios.

Dividend stocks have lower tax rates

Safety and stability though are not the only advantages of investing in dividend stocks. Another major benefit is the fact that shareholders pay lower taxes on cash dividends than they would on any profits they might make from the short-term sale of an equity stock, for instance. The reason for the lower tax rate on dividend stocks is fairly straightforward. Dividends are taxed twice. The company that is paying out the cash dividends pays taxes on it upfront to the government even before the cash is distributed to the shareholders. Recipients of the dividend are also taxed. Because of this double taxation on dividends, the amount paid by the recipients in the form of taxes is relatively small.

Investing is easier

Investing in dividend stocks is also relatively easier than trying to make money by trading in stocks. Investors who do their research well and choose their dividend stocks wisely are assured of a steady, long-term source of passive income. Beyond the initial research and stock selection, investors really have to do little else to make money from dividend stocks. That’s fundamentally different from trying to be profitable trading stocks where investors typically need to not only choose wisely, but also need to constantly keep monitoring market conditions to find the right moment to buy and sell stocks.

Dividend stocks provide a hedge against inflation

Dividend stocks can also provide a hedge against inflation and a safety buffer during a recession. Dividend stocks typically yield greater returns during an economic boom and therefore can act as a hedge against inflation. During an economic downturn when stocks and bonds exercise/>lose value, shareholders can always choose to cash their dividend checks to tide them over.

Dividend payouts happen even if stock exercise/>loses value

Importantly, the dividend amounts that are paid out during a particular period are not directly dependant on the stock price but rather on the profits the company makes. As a result, even if the value of the company’s stock was to go down suddenly the dividend payouts are unlikely to be impacted, at least so long as profits are more or less in line with expectations.