Harness Money

Dividends are really attractive.

A person gets paid every 3 months for owning shares of a profitable business. In the United States there are lots of profitable businesses. Right now I have been dividend investing for about 10 years.

Eek. I am getting older. But back to the dividends.

One the big reasons that the entire US stock market has done so well over the decades is due to dividends. Many investors receive their dividends and reinvest them back into the market. Back into the businesses that paid them the dividend.

Investors are not required to reinvest back into the market. And many of them don’t. Many people invest in the market for decades in order to one day live off their stock investments. This is what I plan to do. I am not ready to pull that trigger yet, but one day I will get there.

Some great characteristics of dividends:

• Great companies, like Walmart or JP Morgan Chase, generally pay out every 3 months.
• They are taxed at a lower rate than regular income
• The dividend payout per share will generally increase over time. Not always, but most management teams want to keep dividend shareholders happy.

Businesses are always trying to grow. To increase their revenue and net income. There are several reasons for this. One reason is that if a business is not growing it many cases it will start to decline.

But there is also management. The managers of publicly traded stocks are often receive a part of their payment in the form of stock. The longer they stay the more shares the receive and those share pay dividends.

Business growth = higher net income = higher dividends per share.

This is a major incentive for a manager to push the business hard for more growth.

Dividend stock performance

Dividend ETFs have done well over the last several years. Take a look at the chart below.

This is not to say that these stocks have beat the market or have done better than growth stocks. This class of stocks has just been able to increase their value over time.

This trend is unlikely to stop anytime.

And while the underlying stocks make gains you make income.

Choosing dividend stocks

It is time to be choosy.

Only specific stocks should make it into your dividend portfolio.

Obviously you want to pick stocks that pay a regular dividend.

Here are some things you should consider:

• How long has the stock paid a dividend?
• What is the dividend yield? Not too high or too low
• Has the dividend been growing over time?
• Is the stock industry growing?

Before you build your portfolio make sure that you have strict dividend criteria. These stocks should quality businesses that you hold for decades. Write down you dividend stock criteria in order to revisit it in the future.

I use my criteria quite often when researching new stocks I find that might be good candidates to add.

What is the alternative?

There are many profitably alternatives to dividend investing. Real estate, growth stocks, starting your own business. They can all provide you with the income you need to survive and thrive.

Growth stocks provide the investor with long term capital gains. One of the best growth stocks is Berkshire Hathaway, aka Warren Buffett, which does not pay a dividend and has seen massive growth over the decades. Berkshire has also benefited from owning dividend paying stocks.

Most of us will be real estate investor, or at least purchase a property. Real estate can be a lucrative investment endeavor with positive tax implications. But it can also be time consuming.

Conclusion

The magic does not happen overnight or in one year.

Dividend investing requires either massive investment upfront or many years of compounding. My own portfolio started at 0 and has grown slowly as I have been able to more money each month over time.

If you reinvest dividend eventually the snowball takes over and your portfolio gains become more and more significant. But you have to persistent in reinvesting and adding your own capital into the stocks.

Know that you are not alone, many many people are dividend investors whether they know it or not.

Look at each dividend stock you own as a stream of income.

Have a plan

Before you start your portfolio or if you have already started it, have an exit plan.

• Why are you doing this?
• How much you want to have in this portfolio?
• When is it time to stop reinvesting the dividends and start living off them?
• What other sources of income are you going to have?

Write out the details of your plan. This is a great reference if you ever forget why you started this process.

Good luck!

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