Dividend Investing to Reduce Risk

Dividend investing is a great way to mitigate risk when investing in publicly traded stocks.  Dividends are quarterly payments companies provide to shareholders of common and preferred stock.  Usually the dividend amount is declared during the quarterly earnings announcement held with financial analysts.  The amount is generally determined based on the companies earnings and net profit.

Another way to think about dividend investing is that the company is paying you so called "interest" on your original investment (stock purchase) in the company.  So why is this a good way to reduce investment risk?  Say a dividend stock is paying annual dividend of $5.00 per share, and the current stock prices is $100.  The annual percentage return would then be 5% of your money invested.  If you purchase 100 shares of stock at $100, your total investment is $10,000.  Since you purchased 100 shares, the dividend amount would translate to $500 a year, or $500 divided by $10,000 resulting in 5% annual return on your investment.  Now if the stock drops in price to say $97, you would have a paper loss of $300 ($3 price drop times 100 shares).  However due to your divident payment of $500 on a yearly basis, you would actually still be making money on your investment.  In this case, you should still have a profit of $200 ($500 dividend payment minus $300 loss due to stock price drop).

So as you can see, investing in stocks that pay reasonable dividends can provide protection and reduce risk in your overall investment.  On the other hand, if the stock increases in value, which we all hope will happen, the dividend adds a nice addition to your overall profits.

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