High returns now…high dividends later
I’ve always been intrigued by dividend investing and cover this investing strategy on my Beat The Market YouTube channel. The idea of buying a stock and getting paid to hold onto that stock is as passive as passive income gets.
If you run social media ads and make your income that way, most of the work is passive, but you still have to actively manage the ads.
Dividend investing is truly a passive income source. Just do some research, find stocks that align with your criteria, and start investing.
But dividend investing isn’t for everyone.
When a stock issues a dividend of $1/share, that’s $1/share the company could reinvest but chooses not to. In other words, a company offering a $1/share dividend will lose $1/share in value, thus cancelling out the dividend.
Dividend investors who want the income won’t care for this detail. The extra income pays off a few expenses and they don’t have to sell any shares. And sure, dividends aren’t exactly tax friendly, but they do provide extra income that can meaningfully pay expenses over time.
Assuming you pick the right stocks or funds, the dividend will grow each year.
However, this is where the benefits end. Most stocks that offer attractive dividend are more mature companies that won’t have skyrocketing growth moving forward.
You can find some stocks with a 2–3% dividend yield and enough growth prospects to beat the market, but you miss out on some of the high flying stocks that don’t offer dividends.
Companies that don’t offer dividends reinvest their money back into the company. Those reinvestments can be strategically deployed for strategic growth. If you look at most of the top performing stocks, you’ll notice they don’t offer noteworthy dividends or any at all.
While NVIDIA offers a dividend, it’s negligible at best. Carrier Global Corp., NortonLifeLock Inc., and Newmont Corp. are the only three stocks that offer noteworthy dividends (above 1% in my opinion).
Carrier Global Corp. just started to roll out its dividend and NortonLifeLock is the only stock on the list with a yield higher than 2%.
Most dividend investors gravitate towards higher yield companies that are more mature and don’t promise as much upside.
Back when I was a hard core dividend investor, I had a big position in Cisco. I loved their growing 3% dividend yield and believed they could maintain some growth. Cisco is a great company that has some headwinds at the moment, and my returns reflected that.
Eventually, I decided to sell out of my position and invest in smaller companies with more growth prospects such as Pinterest and Roku.
While these companies don’t offer dividends, they increase my money faster than most dividend stocks.
You could also opt for a dividend growth strategy where you pick a stock that has some growth left and continues raising its dividend. Semiconductor producer Texas Instruments is a poster child for this strategy.
Not only has the stock almost tripled in 5 years, but so has the dividend payment. In 5 years, Texas Instruments went from providing shareholders with $1.52/share in annualized dividends to $4.08/share in annualized dividends.
Dividend paying companies with some growth on the table and low dividend payout ratios can follow the Texas Instruments formula.
But I preferred to shift towards stocks that could become multi baggers in the future. Why?
Because that’s when I might actually need the dividend payments.
Don’t get my wrong, any dividend payment is a welcomed event, and I do have some funds and growth stocks that provide small dividends.
However, dividend investing is something that works better if you have more money. I’d rather accumulate wealth through stocks with multi bagger potential and build a dividend portfolio on the side.
AT&T isn’t the right stock for everyone. It’s a good stock to retire with for the income but not a great stock for long-term growth.
I have spreadsheets that I still use to track my monthly dividends. However, I pay more attention to my portfolio’s performance. I’d rather see my portfolio appreciate by 20% without receiving any dividends than see my portfolio appreciate 10% with a 3% dividend yield.
Dividend investing is an attractive long-term strategy, but think of the type of investor you are now. Do you need the dividend payments to pay off your expenses, or is it just a nice to have?
Since I’m in my 20s, I’m focused on stocks that will make me the most money. Later in my life, I’ll focus more heavily on dividend stocks which means less of an upside but lower risk and passive income to boot.