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Wednesday, December 6, 2023

Why I Love Dividend Investing


In 2010, I stop my job to work on my first private finance weblog. My job was nice.

I used to be a software program engineer at Booz Allen Hamilton and was effectively paid. Our shoppers have been authorities businesses with multi-year contracts doing essential work. I favored every little thing in regards to the job besides after I needed to commute to shopper websites, which wasn’t usually.

I stop as a result of I needed to spend extra of my time on a enterprise that was rising and in addition doing effectively. I needed to keep away from the remorse I’d really feel if issues went badly and I wasn’t all in.

Because the enterprise generated money stream, I might take a few of that and constructed a portfolio of corporations that paid dividends. The dividends acted as “revenue insurance coverage” – my portfolio would pay me even when my enterprise faltered.

Folks put money into dividend shares for quite a lot of causes. Mine was for insurance coverage.

That’s simply one of many explanation why dividend investing is so interesting – individuals love money stream.

Dividends aren’t the reply to each query however listed here are a couple of explanation why I feel dividend investing is such an excellent reply to lots of them.

Desk of Contents
  1. There’s Consolation in Cashflow
  2. Dividend Shares Supply Stability
  3. Dividend Shares Are Not Attractive
  4. Scratch The Investing Itch
  5. You Can Reinvest These Dividends
  6. Why Do Some Dislike Dividends?

Aspect Story: The explanation I first checked out dividend shares was due to Warren Buffett. Yearly, he writes a letter to the shareholders of Berkshire Hathaway and yearly I learn it.

In 1994, Berkshire Hathaway accomplished its buy of 400 million shares of Coca-Cola at a complete price of $1.3 billion.

In 1994, Berkshire acquired $75 million in dividends.

In 2022, it acquired $704 million.

Oh, these 400 million shares are value nearly $25 billion now. That’s why dividend development corporations have been so interesting to me. 🤑

There’s Consolation in Cashflow

Dividend shares supply the one factor that provides us consolation – cashflow.

Constructing fairness is nice and all however human beings like cashflow. This is the reason we level to how a lot somebody makes versus how a lot wealth they’ve amassed.

Rihanna was paid $0 for the 2023 Tremendous Bowl halftime present. On the time, individuals cherished mentioning it with shocked faces. They ignore the publicity or the multi-million greenback present finances or the opposite eye-watering statistics, however they love speaking about how she “made nothing” for the present.

Wouldn’t it shock you to be taught that Rihanna is a billionaire? She has quite a lot of companies and it’s estimated that she’s value effectively over a billion {dollars}. She was paid nothing for her efficiency however I doubt she cares, she will do no matter she needs.

Her wealth has created sufficient cashflow that she will decide tasks based mostly on what she needs to do.

That is additionally why so many individuals go to work – as a result of they’re being paid. They could just like the work however many people wouldn’t work without cost… we couldn’t afford it.

By build up a dividend portfolio, you construct cashflow so you possibly can decide and select what you need to do. With a portfolio of investments, you possibly can make the most of the Purchase, Borrow, Die technique.

As for us, my main revenue is from this web site. There’s instability in operating your individual enterprise and the cashflow from dividend shares gives revenue insurance coverage. By having a portfolio that generates money that may pay for our bills, any adjustments within the revenue from the enterprise are much less impactful.

Dividend Shares Supply Stability

Fashionable dividend shares are typically mature corporations. They aren’t startups or companies in risky markets. They are typically corporations with an extended historical past of dividend funds.

This is the reason there are lists like Dividend Aristocrats, corporations which have elevated their nominal dividend payout for not less than 25 years. As of 2023, there are solely 67 corporations on the record. Buyers don’t prefer it when an organization cuts its dividends, no matter how giant it could be, and when you make it on the record, these corporations in all probability really feel the stress to remain on the record.

This gives some stability in an in any other case risky market.

When the inventory market is roaring, stability is boring. In a risky one, it’s comforting.

The majority of our investments are in index funds. I liken the dividend inventory portfolio to the life boats on a luxurious cruise liner. They’re a really small a part of the boat that helps me sleep at night time.

Dividend Shares Are Not Attractive

What makes them comforting additionally makes them not practically as attractive to personal or speak about. For years, it appeared like each inventory dialog concerned Tesla. How the inventory was up large, how the inventory was now down, what number of automobiles did they ship final quarter? blah blah blah.

For people who owned a couple of shares, it was thrilling. For individuals who didn’t (till it was added to the S&P 500), it was not.

However dividend investing is traditional “gradual and regular wins the race.” There’s no magic bullet or secret technique to get wealthy, it’s quite simple.

You must save a ton, make investments it in dividend corporations, discover development ones that enhance better than inflation, wait wait wait.

As a result of it’s not attractive, there’s nothing to promote you.

Heck, even brokerages don’t like them as a result of dividend development buyers have a tendency to purchase and maintain for a very long time. That’s boring.

I find it irresistible.

Scratch The Investing Itch

I take pleasure in going to Vegas and enjoying some Pai Gow and Blackjack. Typically even just a little Craps and Roulette (hardly ever).

I do know they’re all damaging EV (anticipated worth) video games and that the on line casino at all times wins. I’m high-quality with it as a result of it’s entertaining and I keep inside my small limits.

I additionally take pleasure in having (and telling) the occasional “hey I invested on this inventory and it did this!” story. With dividend shares, I get to do it in a method that feels barely extra accountable than plowing my cash into shares of Tesla or Gamestop.

I don’t attempt to put money into tendencies or momentum or technicals or something like that, I simply decide dividend development shares with an excellent story, stable fundamentals, and I simply wait.

Over time, the shares will go up after which I can declare to be brilliantly sitting on shares of Waste Administration and being up 360% over on shares I purchased on 12/14/2010.

Earlier than you say “wow, 360%!” – that’s unremarkable. it is vitally near the efficiency of the S&P 500 over that very same time interval. However my itch was scratched.

You Can Reinvest These Dividends

Should you don’t want the money stream, you possibly can at all times reinvest the dividends. Personally, I don’t do that as a result of I would like management over my investing schedule. I evaluate this each month at any time when I monitor our web value so I’m by no means lacking it.

And the explanation I don’t reinvest robotically is due to the wash sale rule. You’ll be able to harvest paper losses so long as you don’t purchase these shares inside 30 days (earlier than and after) the sale by which you might be harvesting losses. When you’ve got it set to automated dividend reinvestment, these automated purchases can set off this rule supplying you with rather less flexibility.

This can be a little bit of a boundary case and the overwhelming majority of us would profit from automated dividend reinvestment should you don’t want the money. Simply set it and overlook it.

Why Do Some Dislike Dividends?

The most important argument is that when an organization pays dividends, you get money however you owe taxes. If the corporate have been so nice, they need to re-invest internally and enhance enterprise worth. The inventory value would go up and my holdings can be value extra, with none interim taxable occasions.

I agree with argument. That’s why the majority of my portfolio is in index funds. Lots of these corporations don’t pay a big dividend. (although they do supply a yield, each S&P 500 index yields about 1.50%)

However many dividend buyers need that revenue and taxes are a part of the method. It’s a characteristic, not a bug.

One more reason is that at any time when there’s cash, there are charlatans and cheats. Within the un-sexy world of dividend investing, these scammers are dividend investing “specialists” attempting to promote a dream. There’s nothing magical a few dividend portfolio that pays $20,000 a yr… it’s a $675,000 portfolio yielding 3% a yr.

These scammers will attempt to promote you techniques or secrets and techniques or no matter different rubbish to get you to purchase their system. There’s no system, it’s simply math.

What do you suppose?


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