It’s tough to get rich if you keep all your money in the bank.
Yes, putting money into a bank savings account will earn you a higher return than you would get stuffing those dollars under the mattress. Still, savings accounts have offered meager returns in recent years.
During the past decade, interest rates have remained near historic lows. That means banks have not paid you much to keep your money with them.
Fortunately, rates have begun a steady climb in the past couple of years. In fact, if you haven’t done so recently, you should use our rates search tool to make sure you aren’t losing out on the opportunity to earn a higher rate on your hard-earned savings.
But the fact remains that some people want — or need — higher returns than any bank savings account is willing to pay today. For such folks, purchasing a stock that pays a high dividend might be a better alternative.
Who pays dividends?
A dividend is essentially a payment — in the form of cash or additional shares of stock — from a corporation to its shareholders.
Not every company pays out a dividend. For example, companies that have a lot of room to grow — appropriately called “growth stocks” — put their profits back into their business, rather than sharing them with stockholders.
But other companies do pay out dividends. Companies can pay dividends at whatever frequency they choose, and most pay shareholders every three months. Regardless of the pay dates, when you see a dividend number as a value in dollars and cents, it’s usually the annual payout per share.
So, if a company has a dividend rate of 20 cents per share, that means it pays 5 cents per share quarterly.
You can automatically reinvest dividends
You probably know that savings accounts have compound interest — in other words, they pay interest on your interest earnings. You can achieve something similar with dividend-paying stocks by reinvesting your dividends.
Let’s say you buy 300 shares and reinvest all dividends. A decade later, you have accumulated 330 shares. In effect, you have raised your stake by 10 percent without investing another dime.
Companies can raise, lower or even eliminate dividends at the whim of their boards. The ideal company, of course, has a record of increasing their payouts over time. Standard & Poor’s recognizes companies that have raised dividends annually for at least 25 consecutive years as “dividend aristocrats.”
You pay less tax on dividends
Provided they are “qualified” (most U.S. companies make the cut), dividends are taxed at a lower rate than interest. Depending on your level of taxable income, you will pay zero percent, 15 percent or 20 percent tax on your dividends.
However, no one can claim that you can make an apples-to-apples comparison between dividend stocks and insured bank accounts. Bank accounts are insured, stocks aren’t. Stocks can — and periodically do — go down in value, and that includes dividend stocks. So they’re not for everybody.
Still, for a portion of your savings, dividend stocks — which offer the chance for much higher returns than a bank savings account — can be a potential partial solution to today’s low savings account rates.
Do you own any dividend-paying stocks? Share your experience in comments below or on our Facebook page.