There are a number of different strategies investors utilize when putting money to work in the stock market. While investing in value or growth stocks is a debate that receives a lot of attention, others might focus more on dividend investing. The goal is to earn a stream of income from the stocks one owns, but at the same time benefit from the potential for share-price appreciation.
But if you’re a big fan of dividends, then maybe it’s time to consider staking your cryptocurrency holdings to achieve the same goal. Let’s take a closer look.
Show me the dividends
Dividend-paying businesses are often sustainably profitable enterprises that have enough cash on hand to consistently pay a portion of profits to investors, usually every quarter. The result is that owning these companies can produce returns that outperform the broader S&P 500 index. What’s more, these stocks trade with less volatility, making them easier to own in one’s portfolio.
To be clear, holding these stocks isn’t a strategy that is solely for people close to or in retirement. Even younger investors can take advantage of the benefits of owning dividend payers as part of a well-diversified portfolio with a long-term focus.
Some examples of popular dividend-paying stocks are Lowe’s and Target. Both of these top-notch retailers have actually increased their dividends for at least 50 consecutive years, giving them the title of “Dividend Kings.” And they can be nice additions to anyone’s portfolio.
All about staking
For those who are interested in income-producing assets, staking your cryptocurrencies is a strategy to earn yield, not unlike what dividend stocks can provide. This can only be done with cryptos that operate what is called a proof-of-stake (PoS) consensus mechanism, meaning that token owners lock up, or stake, their holdings in order to help secure the network and verify transactions. And for doing this, stakers receive rewards in the form of newly minted tokens.
After “The Merge,” Ethereum will be the most popular PoS blockchain. But Coinbase has already allowed for staking, offering a yield of greater than 3% to ETH holders. This system is more environmentally friendly than Bitcoin, which uses proof-of-work validation. And for investors, it doesn’t require the need for any specialized equipment or expertise. Cardano and Solana are other well-known cryptos that run PoS.
Staking does have its fair share of risks as well, however. For starters, the prices of cryptocurrencies are extremely volatile, so depending on how long your holdings are required to be locked up for, it could be difficult (or impossible) to sell in order to minimize any potential losses. Then there’s the chance of a network failure or hack, an event that seems to be all too common in this space. And finally, staking doesn’t provide any insurance in the event your funds are lost, a protection that is given to traditional brokerage accounts.
Although 2022 has been a terrible year for cryptocurrencies, as the overall market is down roughly two-thirds from its peak of nearly $3 trillion in November last year, the long-term growth potential of the industry can’t be ignored. And this means that staking could one day become an even more popular way to earn a yield on any digital assets owned. It is certainly not without risks, but investors would be wise to at least consider this option, especially as the world moves toward an increasingly digital future.
Neil Patel has positions in Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Inc., Ethereum, Solana, and Target. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.