In 2010, I quit my job to work on my first personal finance blog. My job was great.
I was a software engineer at Booz Allen Hamilton and was well paid. Our clients were government agencies with multi-year contracts doing very important work. I liked everything about the job except when I had to commute to client sites, which wasn’t often.
I quit because I wanted to spend more of my time on a business that was growing and also doing well. I wanted to avoid the regret I’d feel if things went badly and I wasn’t all in.
As the business generated cash flow, I would take some of that and built a portfolio of companies that paid dividends. The dividends acted as “income insurance” – my portfolio would pay me even if my business faltered.
People invest in dividend stocks for a variety of reasons. Mine was for insurance.
That’s just one of the reasons why dividend investing is so appealing – people love cash flow.
Dividends aren’t the answer to every question but here are a few reasons why I think dividend investing is such a good answer to many of them.
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Side Story: The reason I first looked at dividend stocks was because of Warren Buffett. Every year, he writes a letter to the shareholders of Berkshire Hathaway and every year I read it.
In 1994, Berkshire Hathaway completed its purchase of 400 million shares of Coca-Cola at a total cost of $1.3 billion.
In 1994, Berkshire received $75 million in dividends.
In 2022, it received $704 million.
Oh, those 400 million shares are worth almost $25 billion now. That’s why dividend growth companies were so appealing to me. 🤑
There’s Comfort in Cashflow
Dividend stocks offer the one thing that gives us comfort – cashflow.
Building equity is great and all but human beings like cashflow. This is why we point to how much someone makes versus how much wealth they’ve accumulated.
Rihanna was paid $0 for the 2023 Super Bowl halftime show. At the time, people loved mentioning it with shocked faces. They ignore the publicity or the multi-million dollar show budget or the other eye-watering statistics, but they love talking about how she “made nothing” for the show.
Would it surprise you to learn that Rihanna is a billionaire? She has a variety of businesses and it’s estimated that she’s worth well over a billion dollars. She was paid nothing for her performance but I doubt she cares, she can do whatever she wants.
Her wealth has created enough cashflow that she can pick projects based on what she wants to do.
This is also why so many people go to work – because they are being paid. They may like the work but many of us would not work for free… we couldn’t afford it.
By building up a dividend portfolio, you build cashflow so you can pick and choose what you want to do. With a portfolio of investments, you can utilize the Buy, Borrow, Die strategy.
As for us, my primary income is from this website. There’s instability in running your own business and the cashflow from dividend stocks offers income insurance. By having a portfolio that generates cash that can pay for our expenses, any changes in the income from the business are less impactful.
Dividend Stocks Offer Stability
Popular dividend stocks tend to be mature companies. They aren’t startups or businesses in volatile markets. They tend to be companies with a long history of dividend payments.
This is why there are lists like Dividend Aristocrats, companies that have increased their nominal dividend payout for at least 25 years. As of 2023, there are only 67 companies on the list. Investors don’t like it when a company cuts its dividends, regardless of how large it may be, and once you make it on the list, those companies probably feel the pressure to stay on the list.
This offers some stability in an otherwise volatile market.
When the stock market is roaring, stability is boring. In a volatile one, it’s comforting.
The bulk of our investments are in index funds. I liken the dividend stock portfolio to the life boats on a luxury cruise liner. They’re a very small part of the boat that helps me sleep at night.
Dividend Stocks Are Not Sexy
What makes them comforting also makes them not nearly as sexy to own or talk about. For years, it seemed like every stock conversation involved Tesla. How the stock was up huge, how the stock was now down, how many cars did they ship last quarter? blah blah blah.
For folks who owned a few shares, it was exciting. For those who didn’t (until it was added to the S&P 500), it was not.
But dividend investing is classic “slow and steady wins the race.” There’s no magic bullet or secret way to get rich, it’s very simple.
You have to save a ton, invest it in dividend companies, find growth ones that increase greater than inflation, wait wait wait.
Because it’s not sexy, there’s nothing to sell you.
Heck, even brokerages don’t like them because dividend growth investors tend to buy and hold for a long time. That’s boring.
I love it.
Scratch The Investing Itch
I enjoy going to Vegas and playing some Pai Gow and Blackjack. Sometimes even a little Craps and Roulette (rarely).
I know they’re all negative EV (expected value) games and that the casino always wins. I’m fine with it because it’s entertaining and I stay within my small limits.
I also enjoy having (and telling) the occasional “hey I invested in this stock and it did this!” story. With dividend stocks, I get to do it in a way that feels slightly more responsible than plowing my money into shares of Tesla or Gamestop.
I don’t try to invest in trends or momentum or technicals or anything like that, I just pick dividend growth stocks with a good story, solid fundamentals, and I just wait.
Over time, the shares will go up and then I can claim to be brilliantly sitting on shares of Waste Management and being up 360% over on shares I bought on 12/14/2010.
Before you say “wow, 360%!” – that’s unremarkable. it is very close to the performance of the S&P 500 over that same time period. But my itch was scratched.
You Can Reinvest Those Dividends
If you don’t need the cash flow, you can always reinvest the dividends. Personally, I don’t do this because I want control over my investing schedule. I review this every month whenever I track our net worth so I’m never missing it.
And the reason I don’t reinvest automatically is because of the wash sale rule. You can harvest paper losses as long as you don’t buy those shares within 30 days (before and after) the sale in which you are harvesting losses. If you have it set to automatic dividend reinvestment, those automatic purchases can trigger this rule giving you a little less flexibility.
This is a bit of a boundary case and the vast majority of us would benefit from automatic dividend reinvestment if you don’t need the cash. Just set it and forget it.
Why Do Some Dislike Dividends?
The biggest argument is that when a company pays dividends, you get cash but you owe taxes. If the company were so great, they should re-invest internally and increase enterprise value. The stock price would go up and my holdings would be worth more, without any interim taxable events.
I agree with argument. That’s why the bulk of my portfolio is in index funds. Many of those companies do not pay a significant dividend. (though they do offer a yield, every S&P 500 index yields about 1.50%)
But many dividend investors want that income and taxes are part of the process. It’s a feature, not a bug.
Another reason is that whenever there’s money, there are charlatans and cheats. In the un-sexy world of dividend investing, those scammers are dividend investing “experts” trying to sell a dream. There’s nothing magical about a dividend portfolio that pays $20,000 a year… it’s a $675,000 portfolio yielding 3% a year.
Those scammers will try to sell you systems or secrets or whatever other garbage to get you to buy their system. There’s no system, it’s just math.
What do you think?