Investing in the stock market can feel overwhelming and complicated. One decision you’ll need to make is choose between Dividend Stocks vs Index Funds, a mixture of both, as well as other investments for your portfolio.
My parents bought me my first stocks and mutual funds when I was 5 (Thanks!!) through UGMA accounts. I started investing in dividend stocks when I was 18 but did not have great luck with my choices. While I decided to change my plans back to index funds, years later I realized the dividend returns were significantly down after a turbulent market year.
Let’s take a closer look at investing in dividend stocks vs index funds, especially if you’re a long term buy-and-hold investor.
Deciding between Dividend Stocks vs Index Funds
Let’s take a look at a Dividend Stocks
Dividend stocks can have a positive return on your investment portfolio if chosen wisely. A dividend is a payment from a company distributing a portion of it’s earnings or (cash) reserves to it’s shareholders, usually quarterly.
You can choose to reinvest those dividends automatically back into the same company. By reinvesting each quarter you’ll receive a slightly larger dividend because you have slightly more shares for each future payment larger number of shares.
And if the company increases the payout per share, usually announced annually, you’ll also receive a slightly larger payout. Overtime, these slight increases snowball into larger quarterly and annual dividend payments. You may hear this referred to as the dividend snowball.
Of course there’s a risk f you choose the wrong dividend stock, you may loose your investment if the company runs into trouble as far as declaring bankruptcy.
When choosing for companies to invest in, look for standing companies with a history of paying dividends, such as the dividend kings and dividend aristocrats, that were able to navigate through tough market conditions.
While there’s 100% of future returns on based past performance, it’s a helpful place to start as you build your investing experience.
And now a quick look at Index Funds
Index Funds are portfolios of stock holdings with preset set of rules of what to buy, when sell, and when to hold. These portfolios don’t require as much from tracking from you as they are professionally managed.
Index Funds invest in many different companies so this helps insulate the overall value of the portfolio if one of the companies runs into trouble. There a definitely pros and cons to investing in individual dividend stocks vs index funds.
From my experience, this is where I had some trouble with my investment returns, especially in a volatile market yet. With all the movement of share prices, I’m assuming the fund has an active year of buying and selling of shares. The extra expenses must have reduced the fund’s income available to distribute in terms of dividends and capital gains.
Don’t get me wrong. Index funds are not a bad type of investment and I still have a few of my fund holdings. Some are managed better than others. For example, I owned one fund for more than a decade, and it stayed at about the same value, even with reinvestment. And for another fund in my portfolio, it has done amazing well, currently valued multiple times the original investment.
You’ll need to decide which works best for you, your portfolio, and your risk tolerance.
Why my portfolio is focused on Dividend Stocks vs Index Funds
At one point in my investing history, I lost confidence in my ability to successfully choose individual dividend stocks. I was motivated to try again after a dismal year of returns from my index funds. While researching the holdings of index funds, I realized I could build my own portfolio of stocks using the funds as guidance.
By buying individual stocks and holding the shares, I the control of my holdings I wanted, rather than delegate the decisions to a third party. I was also able to estimate my potential monthly dividend income by creating a portfolio of mostly individual dividend stocks
To start, I recreated my IRA portfolio as a divided stock portfolio because I didn’t have to worry about capital gains taxes. As I move forward with my taxable accounts, I’m taking an intentional approach to deciding what to keep and when to sell.
Over to you. Do you prefer dividend stocks vs index funds.
Or are you investing in something else? How did you choose your investment types?
For me, choosing between dividend stocks vs index funds it was ultimately based on experience. And sometimes you need to go through those cycles to build the confidence in order to build the investment portfolio that’s right for you.
Pin for later