The Dividend Flywheel
First of all, what in the world is a flywheel?
By definition, a flywheel is a mechanical device used to store rotational energy, which it can then convert to kinetic energy.
It consists of a heavy wheel with a central axis that can rotate freely, and its primary purpose is to smooth out and stabilize the rotation of a machine by storing excess energy during periods of surplus and releasing it during a deficit, thereby maintaining a more constant rotational speed.
The flywheel's stored energy conversion keeps things spinning despite any fluctuations. At rest, a flywheel is heavy and hard to rotate. But once you get it to spin, keeping it spinning becomes easier and easier.
For a flywheel to work, it needs to meet the following criteria:
The cycle of activities must flow from one into the next with as little friction as possible
Each rotation of the flywheel needs to be easier than the previous
Each rotation needs to be more effective than the previous
Coalbrookdale locomotive with a flywheel
Believe it or not, an effective dividend portfolio operates much like a flywheel.
When you first start investing, the growth of your portfolio comes at a snail's pace and the momentum seems impossible to create. However, with each reinvestment, the momentum slowly builds and the power of your reinvestment is greater than the previous.
Self-made graphic. As you can tell, art is not my forte
The magic lies in letting the flywheel do its thing for months, and years, and decades without interruption. After a period of time, the flywheel (or the dividend snowball as it's more commonly referred to) will take on a life of its own, and the power of your dividend reinvestments will become an unstoppable force.
This is how real wealth is built, and this is how financial freedom is achieved, but the length of time it takes, and the patience it requires presents a difficult obstacle for many.
...and believe me, I understand. It's hard to get excited about something that's going to take 5, 10, or 20 years to build real wealth.
But if you get the flywheel spinning and allow it to build momentum, you will reach a point, and it’ll come sooner than you think, where the progress you’re making becomes impossible to ignore, and you’ll find that your dividend snowball is really starting to take off.
In this video here, I'll show you where this point is, when it happened for me, and what it's going to take to reach this point in your own portfolio.
With that, I want to hear from you. How much dividend income are you currently bringing in, and how long did it take you to get there? Write to me here and let me know.
And a big thank you to the 17 readers who responded last week. You rock! 🙌
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IN MY PORTFOLIO
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ICYMI
In this video, I'm reviewing 10 of the most popular dividend ETFs and will rank them from best to worst.
In my most recent portfolio update, I'm spilling the beans on what's cooking in my portfolio. I'll share the dividend stocks I've been buying, how much my income has grown in the last month, and the juicy details on which stocks are currently sitting on my watchlist.
We all need a North Star; some sort of guiding investment principles to follow, and in this recent Dividend Happy Hour I'm sharing mine as they've developed so far.
CAREFULLY CURATED
WHAT I’M WATCHING
WHAT I’M LISTENING TO
WHAT I’M READING
SINCE YOU ASKED
"I have SCHD, but would you recommend to buy individual stocks also?"
- Justin | Email Submission
Because SCHD already offers a lot of diversification with its 104 different holdings, I personally don't think you need to buy individual stocks on top of owning the fund.
With that said, if you want to try your hand at picking individual stocks, there's nothing wrong with that either, and having SCHD be the foundation of your portfolio as you do so is a great way to go. At least, you could certainly do worse.
Have a question? Ask me here to see it featured in an upcoming newsletter.
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