The Most Underrated Benefit of Dividend Investing
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I don’t know about you, but I’m no fan of needles. Haystacks don’t do much for me either.
Thankfully, building wealth with dividend investing doesn’t require you to go searching for one inside the other. That’s one of the most underrated benefits of doing this, and it’s one of the reasons why I think this is a great approach for anyone, especially those who are just starting out.
There's a common misconception in investing that more risk equals more reward. Following this way of thinking can be thrilling at times, but it can also lead you down a path of chasing riskier, more obscure companies that are said to be the “next big thing” but have yet to show their wherewithal. In some cases, these companies may not even be generating a profit, and may actually be losing a considerable amount of money.
In my opinion, this is not a viable long-term strategy for individual investors like us, although I understand the allure. The hope is that these obscure companies fulfill their prophecy, turn a profit, and do become the “next big thing,” which would cause them to skyrocket in share price.
The potential of this happening is where the thrill comes from, but the odds of it actually happening are pretty slim. Most of these 100-1 shots end up not working out, and as a result, this way of going about the stock market is more akin to gambling than investing, and you don’t want to gamble with your future.
When it comes to dividend stocks, obscurity and risk are the opposite of what you want. Instead, you should seek dependability and familiarity. You don’t need to overcomplicate it.
Fortunately, the best dividend stocks are usually the most obvious. They’re the opposite of the needle in the haystack. They’re the high-quality, tried-and-true businesses that are right in front of your face. You encounter them every day, so you know them pretty well.
Peter Lynch often emphasizes this point, urging investors to "Invest in what you know," which parallels Warren Buffett's idea of investing within your Circle of Competence.
For most of us, especially when first starting out, what you know will certainly include some of the world’s most recognizable companies, which just so happen to be some of the most iconic dividend stocks out there like Coca-Cola (KO), McDonald's (MCD), Procter & Gamble (PG), and the twenty others I’m telling you about here.
As opposed to the riskier, more obscure companies (like what in the world is NVAX or ATOS?), these businesses are actually making money. They tend to have more predictable earnings and should be more capable of paying consistent and dependable dividends over a long period of time. This is the type of business you want to own, especially if your goal is to someday live off your dividend income.
Having said all of that, I want to hear from you: When you think of dependable dividend paying companies, what are some of the first names that come to mind? Write to me here and let me know.
And a big thank you to all of the readers who responded to last week's newsletter! You can read some of the responses down below in the "Hot Takes" section. 👇
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IN MY PORTFOLIO 📈
Track your portfolio for free with getquin. You can also follow mine there (@ryne) to see all of my purchases, dividends, and other updates in real-time.
ICYMI 🎥
This Is The NEXT Dividend Stock I’m Buying
I think I’ve figured out the next dividend stock I'll be adding to my portfolio, and this one might surprise you. It's one that I've been pretty hot and cold with for a while now, but I think I'm finally ready to pull the trigger on it.
CAREFULLY CURATED 🔍
📺 Why Dividend Investing Is Better Than Growth - Although no investment strategy is flawless, dividend investing tends to attract more than its fair share of criticism. This video counters some of those criticisms, and is honestly one of the funniest investing videos I've ever watched. Kudos to this creator for their quick wit!
🎧 Off The Wall - This episode of the Founders podcast covers the story of one of my all-time favorite brands: Vans. Coincidentally, I'm wearing my checkered slip-ons as I'm writing this right now.
📚 The Inner Scorecard - According to Warren Buffett, the key to mastering life is found in the Inner Scorecard. When you have an Inner Scorecard, no one can define success for you but you.
SINCE YOU ASKED 💬
"Can you quickly explain the relationships between the payout ratio and the growth rate along with the yield? I'm a bit confused when it comes to how all these things lend a hand to each other."
- @markrouch4159 | YouTube
First and foremost, let's start with the payout ratio. This is the percentage of a company's earnings it pays out in dividends, and you can calculate it by dividing a company's dividend payment per share by its Earnings Per Share (EPS).
Using Coca-Cola (KO) as an example, the dividend payment per share is $1.94 and the EPS is $2.82, so the payout ratio would be about 68.8%.
Moving onto the dividend yield, this can be found by dividing the dividend payment per share by the current share price. Looking at KO again, the current share price is $63.10, so $1.94 into $63.10 puts you at a 3.07% dividend yield.
With that said, many dividend-paying companies have a tendency to raise their dividends every year. At least, those are the kind you want to own. KO has increased their dividend payments annually for the last 61 straight years, which is insane!
The dividend growth rate, or the CAGR, is the compound annual rate that the company increases its dividend by. So, for example, KO has a 5 year growth rate of 3.5%, which means that the company has increased the dividend payments by that amount, on average, every year for the last 5 years.
Have a question? Ask me here to see it featured in an upcoming newsletter.
HOT TAKES 🔥
In last week's newsletter, we talked about the 5 levels of dividend investing, and I asked readers which level of the dividend investing journey they're in right now. Here are some of the responses:
James S. said: I'm currently in the LeanFIRE stage. My wife and I are building our forever home with cash and will be ready to move in in August. I have about 600K in retirement funds and I'm preparing to transition into a pure dividend player upon retirement; 10 years.
James M. said: I feel like my situation is a teeter-totter between levels 2 and 3 at this point. The reason I say this is because I do have a massive 70k portfolio right now but it’s tough to handle the down months where my dividend income is not as high as the other months. I have been working this out by shifting focus to stocks that I love and follow, but it just impacts differently.
Deepa said: Before I took budgeting and investing seriously, I found myself in a terrible situation and could not find $30 to pay a gas bill. I was making six-figures, but couldn’t come up with $30! It was horrifying to have to scrounge around the house for spare change to pay a $30 bill. I found some loose dollars in my wallet and took all of that to the gas company and paid my bill. I went home and cried, like how did this happen. I then sat down and figured out my budget, paid down debt and started investing. I have a buffer in my account of $100, 3 emergency funds, 2 months of expenses saved and have 2 debts remaining. I started investing on a lark to see how to get dividends to supplement my income as a kind of side hustle. To hit $100 this month, already, is just bonkers to me! That being said, I am definitely in the Second Wind level, probably just entered it with this benchmark.
Ron said: I’m currently at level 5. But I still see around 40 years of retirement (I hope) ahead of me. So I can’t just sit around and let it ride. I actually feel like I am fluctuating between levels 2 and 3. Everything is set up as I like it and the portfolio is on autopilot (level 2). But I am always monitoring my portfolio to see if something better has come along, which prompts me to rejigger things around (level 3?).
Matt said: I think I’m in the 1st level because everything you described was definitely me 100%. I think by the end of the year I’ll be in the 2nd level given I have made it a goal to learn as much as I can this year about being a dedicated dividend investor. My goal by the end of the year is to hit $275 in annual dividends and I just passed $230 today with buying up NEE for the portfolio.
LAST WORD 👋
I’m going to be trying out a new video segment on my YouTube channel where I “react” to your dividend portfolios. It’s a concept I'm excited to explore (though it might end up being a flop, who knows?), and I’d love to feature your portfolio in the video.
If you’re interested in having your portfolio reviewed, simply fill out the form linked here. It’s quick and easy, and it’ll provide me with the information I need to react to your dividend portfolio in the video.
Note: Your privacy is essential, so I’ve made it possible for you to remain anonymous if you prefer. Submitting your portfolio won’t require you to disclose any sensitive personal or financial details.
