Why common stock is central to dividend income investing
Common shareholders benefit from business growth in two ways: rising share prices and rising dividends. When a company earns more money, it can raise its dividend — which is exactly what Dividend Aristocrats have done for 25+ consecutive years.
This is the key advantage of common stock over bonds and preferred stock for long-term income: the income can grow. A bond pays the same coupon for 20 years. Common stock dividends from quality companies may grow 6–10% annually.
Common stock risk vs reward
The trade-off: common shareholders absorb more risk. In bankruptcy, they receive nothing until all creditors and preferred shareholders are paid in full. In a market crash, common stock prices fall further than bonds.
For income investors building for decades, this volatility is typically acceptable because the long-term income growth potential exceeds what fixed income can deliver.
Dividend-paying common stocks
Not all common stock pays dividends. Amazon, Berkshire Hathaway, and many technology companies retain all earnings for growth rather than distributing them. Dividend-paying common stocks tend to be more mature businesses in stable industries — consumer staples, utilities, healthcare, and industrials are well represented.
Related terms
- Preferred stock — the fixed-income alternative with less upside
- Dividend growth rate — how common stock income can compound over time
- Dividend Aristocrat — the elite tier of common stock dividend payers