why dividends are powerful + 1 stock I'm buying every week
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My name is Alex and I love creating streams of passive income. My goal is to help you do the same.
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Announcement
A quick note on investing:
It’s become apparent that tons of new investors are trying to mimic the investing strategies of others. Could be friends, family, or someone they know online. This is dangerous and I’d advise against it.
The reason is, someone who is 60 years old with no kids will invest differently than someone who is 40 years old with 3 kids who will invest differently than someone who is 20 years old and still in college.
Your age, who depends on you financially, the country you live in, your risk tolerance, your time horizon, and your goals. These are all things that build the foundation of your investing strategy. Just because someone says Tesla is the best investment of this decade, doesn’t mean it’s the best investment for you.
You may not be able to stomach the drawdowns of highly volatile growth stocks like they can, resulting in you selling your shares when the price drops. Or maybe dividend investing isn’t for you because you don’t have the patience to wait for your dividends to compound over time.
These are the reasons why I preach finding your own strategy and not just taking the easy route and following someone else’s. Strategies are like diets, they’re not one size fits all.
With that being said, this issue of The Profit Zone is about dividend investing and why *I believe* they are so powerful. I invite you to read it with an open mind, but at the same time realize there are so many other strategies out there. This is just one that suits me. And if it suits you, great!
Enjoy.
Why dividends are powerful
Dividends. Cashflow. Money in your pocket.
There are 2 ways of getting paid from the stock market, capital gains and dividends. In this issue of The Profit Zone, we examine why dividends are powerful and why every investor should generate some form of income from their portfolios. If you’re already a dividend investor (or own some dividend stocks) this might help you stay the course. If you haven’t started dividend investing or maybe you’re waiting for that extra push, this might be it.
A stock’s capital gains potential is influenced by so many different things. Investor confidence, analysts’ predictions, environmental concerns, laws, regulations, and even Twitter.
As retail investors, relying on solely capital gains to grow our nest egg over time is a lot like relying on only one source of income. What happens if everything goes to sh*t? What happens if you get fired tomorrow? What happens if the market dips 50% in 1 week? Dividends are there as a fallback. A margin of safety. Just like you would set up an emergency fund, dividends are a shoulder to cry on when the market isn’t doing too hot.
Investment Return
Dividends help out in an area that investors sometimes fail to consider: the effect of inflation on their portfolios.
It’s common sense that to generate any net return from your investments you must first outperform the inflation rate for that same period, but this fact is often overlooked.
It also helps you generate a return on your investment much quicker than if you otherwise weren’t earning any income. Not one person on the face of the planet knows how stocks will behave over time. But we can gain a pretty damn good understanding of a company’s dividend sustainability (and possibly growth) just by looking at its historical performance. It’s not fair to say that historical performance is a good predictor of future performance, but in this case, I would believe it’s fair to say that historical performance gives us a good understanding of future performance.
Unlike dividends, capital gains are much harder to predict. Think of all the Zoom (ZM) investors who thought the company’s stock would continue to rise past $600/share (it’s now trading around $100 at the time of writing this).
Or what about the Netflix bulls who thought the company was unstoppable, then lost more than 50% of it’s value in a matter of months. These types of investment returns are so difficult to predict. One second you believe in the company, the next you’re questioning your intelligence.
Here’s a great example taken from Fidelity to understand the concept of payback over time using dividends: