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A Dividend Investing Primer

Updated on April 2, 2017

Introduction to Dividends

Honestly, the key to financial security and peace of mind is to invest your money in a way that puts it to work for you. What if you could put your money into an investment vehicle that can snowball over time and produce a passive income stream? The ability to line yourself and your family up for a nice income stream with little "work" is something straight out of Forrest Gump when he gets the letter from Apple in the mail and remarks "one less thing" when he learns that he no longer has to worry about money.

However, there is a solution. There is a way invest your money and be confident that you will win. All you need are two ingredients: time and dividend paying stocks or exchange traded funds (ETFs). Dividend aristocrat stocks which supply passive income over time can form a powerful weapon in your arsenal of being able to tell your boss ADIOS! The earlier you start, the sooner you can become independent since the key ingredient here is time. The power of dividend reinvestment over time is what makes this strategy so effective and unlikely to fail. Even in tough markets, the dividends can save your investment. In bull markets, you can add to the return on the share price any dividends collected.

I hope this hub gives you a bit of perspective !


One Less Thing

Beat the Market

We all know that the stock market can be a scary and volatile place for all investors, even massive hedge funds and professional investment personnel. Most funds managers do not outperform the market no matter what kind of puff they circulate when trying to convince you to give them your hard-earned money. And, like lawyers, they make money no matter what, whether you win or lose. The prospect of betting on the stock market for average people is a very scary proposition which often ends in defeat.

Dividend ETFs

A natural concern for a non-professional investor is the lack of time and expertise in securities and finance. This concern is well-founded since picking individual stocks can be risky. Putting your eggs in one basket can end poorly when that company suffers a set back or gets disastrous press.

This is where ETFs come into play. Dividend ETFs such a SCHD, VIG, and VYM offer diversified exposure to dividend paying stocks. The have modest, but solid dividend yields and are truly positions that you can buy and hold with little need to trade. Just reinvest the dividends and watch the passive come rolling in.

ETFs are perfect for people who are interested in setting it and forgetting like a chicken in the oven.


Prices as of March 17, 2017

Ticket
Dividend Yield
Price
SCHD
2.60%
45.22
VYM
2.74%
78.93
VIG
2.00%
91.44
Not bad yields with broad exposure

Motivation for Dividend Passive Income

The fact of the matter is that you can significantly shorten the duration of your active working career by investing in dividend paying companies as early as possible to begin the snowfall effect created by dividend reinvestment compounded over time. One of the keys to a long, healthy, and less stressful life is to reduce the pressure of living paycheck to paycheck and putting what money you do have to work for you to bring back more friends to the party. In other words, work smarter, not harder.

Dividend Winners

If you want to pick individual dividends stocks to build a passive income portfolio, there are a few simple rules to follow. Picking individual stocks allows you to pick the best in class.

1. Don't always go for the highest yielding dividend stocks, look at the history of increases

2. Look at the price to earnings ratio (P/E) and seek 20 and under

3. Stick with companies you know from your life experiences

4. Think about buying shares of dividend payers that are recession-proof (like food)

5. Diversify across different sectors to spread out the risk

Build an evergreen, long-lasting portfolio which can support your passive income lifestyle as long as you need it. You should not chase a stock simply because it has a very high dividend yield. In fact, sometimes this is a bad sign. A very high dividend yield could result from a dropping price which may turn into a dividend cut, which is very bad. Don't be greedy.


Get to Your Beach Sooner

In closing, we are all not necessarily beach people. But we all have an ideal vision of where we want to be for leisure rather than work. Whether it is a Caribbean beach house or a cottage near the Gates of the Arctic National Park in Alaska, getting on the dividend gravy train as soon as possible can get you closer to that ultimate happy place and out of your daily job.

Enjoy the Journey

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