3 Reasons to Include Dividend Stocks as Part of Your Student Loan Repayment Plan

Tens of millions of Americans are carrying student loan debt. Many millions are also struggling to pay for everything they need to spend money on (such as housing, food, and utilities) and everything they want to spend money on (such as vacations, gifts, and entertainment).

If you're among those who are on the hook for regular student loan payments, you might want to consider investing in some dividend-paying stocks -- which can help with those debt repayments.

Image source: Getty Images.

What's so great about dividends?

Dividend-paying stocks can be powerful wealth builders and deserve strong consideration for spots in your portfolio. Here are some great things about them.

1. Dividend payers tend to be more stable

Any company that has committed to paying its shareholder a dividend is likely to be in a somewhat stable phase of its life -- because dividends are generally paid every quarter (or sometimes monthly), and to have to miss a payment or reduce or eliminate your dividend will reflect very poorly on the company.

So it's typically only when a company's management believes that it has sufficient dependable income to devote to a dividend that it will start paying one.

2. Dividends can boost growth and defend against market drops

Since dividend payers are in some ways healthier than nonpayers, they tend to perform better, in general. Check out how dividend payers compare to nonpayers in the table below, adapted from a Hartford Funds report:

Data source: Ned Davis Research and Hartford Funds.  

Dividend payers can also be more stable than nonpayers. According to a 2023 report by Morgan Stanley, "In fact, in 2022, the S&P 500 overall lost about 18%, but the S&P 500 Value Index (which is often used as a proxy for dividend stocks) kept its losses to about 5%, and the S&P 500 High Dividend Index lost about 1%." Dividend payers can drop in value, of course, but overall, they may hold up better than the nonpayers in your portfolio.

3. Dividend payments tend to be increased over time

Healthy and growing dividend payers will also increase their payouts over time -- often annually. That means that your dividend income is likely to increase from year to year, which can help you meet or beat inflation.

How dividends can help with student loan repayments

If you're very financially strapped right now, living paycheck to paycheck, this strategy might be best saved for later. But if you're currently working and able to save and invest some money while making repayments on your student loan debt, consider this strategy: Invest in dividend payers and use that income to pay down your debt, especially if you have high-interest private student loans that aren't eligible for potential federal student loan forgiveness programs in the future.

Here's an example: Imagine that you've managed to invest $100,000 in dividend-paying stocks with an overall average dividend yield of 3%. If so, you're positioned to collect $3,000 in dividends annually -- with that sum likely increasing over time. The money will accumulate in your investment account, and it can be withdrawn to pay down your debts.

If and when you no longer need that income for debt repayments, you can reinvest it in more shares of stock. That's a powerful wealth-building tactic. Keep all this in mind throughout your financial life, as it can serve you well at other times, too. For example, by the time you retire, if you've managed to build a stock portfolio worth, say, $500,000, with an overall dividend yield of, say, 4%, you're looking at $20,000 in annual income -- which will increase over time. That's not far from the average annual Social Security benefit, which was around $22,000 as of June.

Tapping your dividend income can help you let the underlying stocks remain in your portfolio, where they can keep growing and paying you more dividends. 

Whatever your financial goals and challenges are, there's a good chance that buying into some solid dividend-paying stocks can serve you well.