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 nicely paid. Our shoppers had been authorities businesses with multi-year contracts doing essential work. I favored the whole lot concerning the job besides after I needed to commute to consumer websites, which wasn’t usually.

I stop as a result of I wished to spend extra of my time on a enterprise that was rising and in addition doing nicely. I wished 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 movement, I might take a few of that and constructed a portfolio of firms that paid dividends. The dividends acted as “earnings insurance coverage” – my portfolio would pay me even when my enterprise faltered.

Folks put money into dividend shares for a wide range of causes. Mine was for insurance coverage.

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

Dividends aren’t the reply to each query however listed below are just a few the explanation why I believe dividend investing is such a great 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?

Facet Story: The rationale 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 obtained $75 million in dividends.

In 2022, it obtained $704 million.

Oh, these 400 million shares are price virtually $25 billion now. That’s why dividend development firms had been so interesting to me. 🤑

There’s Consolation in Cashflow

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

Constructing fairness is nice and all however human beings like cashflow. That is why we level to how a lot somebody makes versus how a lot wealth they’ve collected.

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 funds or the opposite eye-watering statistics, however they love speaking about how she “made nothing” for the present.

Would it not shock you to study that Rihanna is a billionaire? She has a wide range of companies and it’s estimated that she’s price nicely over a billion {dollars}. She was paid nothing for her efficiency however I doubt she cares, she will be able to do no matter she desires.

Her wealth has created sufficient cashflow that she will be able to decide tasks based mostly on what she desires 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 increase 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 major earnings is from this web site. There’s instability in working your individual enterprise and the cashflow from dividend shares gives earnings insurance coverage. By having a portfolio that generates money that may pay for our bills, any modifications within the earnings from the enterprise are much less impactful.

Dividend Shares Supply Stability

In style dividend shares are usually mature firms. They aren’t startups or companies in unstable markets. They are usually firms with an extended historical past of dividend funds.

That is why there are lists like Dividend Aristocrats, firms which have elevated their nominal dividend payout for at the least 25 years. As of 2023, there are solely 67 firms on the listing. Traders don’t prefer it when an organization cuts its dividends, no matter how massive it might be, and when you make it on the listing, these firms in all probability really feel the stress to remain on the listing.

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

When the inventory market is roaring, stability is boring. In a unstable 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 almost as attractive to personal or discuss. For years, it appeared like each inventory dialog concerned Tesla. How the inventory was up big, how the inventory was now down, what number of vehicles did they ship final quarter? blah blah blah.

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

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

You need to save a ton, make investments it in dividend firms, 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 adore it.

Scratch The Investing Itch

I get pleasure from going to Vegas and taking part in some Pai Gow and Blackjack. Generally even somewhat Craps and Roulette (hardly ever).

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

I additionally get pleasure from 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 developments or momentum or technicals or something like that, I simply decide dividend development shares with a great 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

When you don’t want the money movement, 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 evaluation this each month at any time when I monitor our internet price so I’m by no means lacking it.

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

It is a little bit of a boundary case and the overwhelming majority of us would profit from computerized dividend reinvestment in case you don’t want the money. Simply set it and overlook it.

Why Do Some Dislike Dividends?

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

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

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

Another excuse 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 couple of dividend portfolio that pays $20,000 a 12 months… it’s a $675,000 portfolio yielding 3% a 12 months.

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?