What Investments Pay Dividends
This article will discuss what investments pay dividends and some common tactics to maximize your income. I will also provide a recent example of a well-positioned, highly-covered dividend growth portfolio.
What is dividend income?
Most investors know that dividends are the primary means of collecting retirement income.
You receive a regular payment from your stock or bond investments in exchange for having some of your capital tied up in them.
When you sell them, you'll likely pay a dividend tax on any capital gain.
That makes dividends very important for retirement. There are two primary sources of retirement income:
Many retirees rely on dividend stocks to provide a significant part of their income, perhaps as much as half of their retirement income.
That's because when you sell your stocks and bonds, you generally lose some or all of your appreciation value.
Dividends are typically tax-deferred and so some or all of your capital gains income might be tax-free.
It's also important to remember that dividends might not be available if your company doesn't pay them.
Stock and bond companies that cut or eliminate their dividends might mean that you're losing the income that can offset some of your other living expenses.
Some other interesting dividend topics
Excluding stocks, bonds, and annuities, what's the most common type of investment dividend?
It's actually the interest you receive from your savings accounts, CDs, and other FDIC-insured accounts.
Interest is the amount of money you get back as a deposit when you make a purchase of money with a credit or debit card or withdraw money from a financial institution.
Most retail banks, credit unions, and internet banks also offer interest-bearing savings accounts.
Interest has a long history and goes back to merchants depositing coins into a deposit box that allowed them to make the transfer to a vendor in the form of a check.
The coins were often used as currency in various locales, and so some folks thought it would be clever to use the coins as currency as well.
And so that's how we got our modern-day interest accounts.
What type of investments pays interest?
Interest generally comes in the form of "interest-bearing" accounts.
When you deposit money into an interest-bearing account, you get the same interest rate as the loan rate for the money in your savings or checking account.
Many banks and other financial institutions use different methods to calculate the interest rate you earn.
An "interest-bearing" account is an account that charges interest.
An interest-bearing account can be a regular savings account, a certificate of deposit (CD), a money market account, a savings bond, an online savings account, a regular checking account, an account that charges you fees, a P2P loan, or any other type of account that you can deposit money into for which you're charged a fee.
When you make a transaction in an interest-bearing account, you're also charged a fee, which is generally a percentage of the transaction.
You'll pay a fee on a withdrawal from a checking account or savings account.
You'll also pay a fee when you make a purchase with a debit or credit card or withdraw money with a wire transfer.
Since deposits into accounts that charge interest incur a fee, not all interest-bearing accounts will be very attractive to the average investor.
While the fees you'll pay on all of these accounts are significant, it's hard to find any consumer product or service that doesn't have fees attached.
Sometimes the fee is nominal and other times it's a pretty substantial percentage.
Interest-bearing accounts that pay high-interest rates are not for everybody.
Those with modest incomes and cash on hand, who can't afford the high fees on interest-bearing accounts, maybe best off holding a money market account, CD, or a certificate of deposit instead.
Interest-bearing accounts that pay relatively low-interest rates are very attractive to a wide range of investors. These accounts are less expensive to maintain and to open than regular savings or checking accounts.
The interest rates on these accounts are typically higher than regular savings and checking accounts, and they usually come with lower fees as well.
If you're worried that the money you're saving in your interest-bearing account will be negatively impacted by inflation, don't be.
Inflation isn't a problem for most people who are saving in interest-bearing accounts. And, since these are insured by FDIC, you won't lose money on a deposit if the bank goes out of business.
What's the difference between interest-bearing accounts and savings accounts?
Savings accounts are different. A savings account is a checking account with a few differences.
You can't receive a paycheck deposited into your savings account, for example, and the interest on your deposits is just 0.01% to 0.15%.
Savings accounts don't incur fees and you won't be charged interest on your savings account, either.
You can open a savings account in just about any bank and most offer higher interest rates than most interest-bearing accounts.
There's a good reason for having a savings account in your wallet: it provides safety, liquidity, and plenty of flexibility to handle daily life expenses.