Not long ago, I asked the following question on a forum:
Just curious, all of you new dividend growth investors, do you use this strategy because you think it will maximize the amount of money you can achieve in the stock market or because you like the idea of getting a stream of dividends? It's a fundamental question which shouldn't be neglected.
The answers I got told me that few people understand: A) The power of compounding, B) how much time it takes before compouding actaully starts to show some results, C) The difference between dividend return and total return.
In this post, I will try to explain and summerize my findings:
It's hard to beat the market if you aim for total returns and have a lot of time
80% of mutual funds (stock pickers) fail to beat the market in the long run. Many investors here ignore total gain and chase dividends regardless of capital depreciation. You can buy high quality companies, sure, and they will make money for decades. But that does not mean you will beat the SPY. Very unlikely even. If you do, you also should account for a ton of more risk than holding in the index with 500 equites.
Many people like the idea of getting some money back over time that one can either re-invest or use for other things, as opposed to just seeing the stock values rise - hoping that they stay up (and not "getting" anything until one sell them or so.) As long as one is re-investing all of the dividends, that's more of a mental exercise in futility though.
Dividend investing can create some peace in mind
For many, there's a psychology to this strategy, whereas if there's a crash, one would take solace knowing they're still collecting returns, even though their principal got wacked. Another observation is that it's a millennial thing: they like to collect income without having to work. Everyone, but especially millennials because they aren't as bound to family and such, should focus on finding a job they like. The idea that one can create a passive income stream without working hard is stupid. Passive income is a result of working hard and earning surplus which can either be invested in the stock market or in real estate.
About time in the market and using the compounding effect:
I often see people saying they started dividend growth investing 4 months ago and they can see the effect of the strategy. That's also false. They can see the effect of adding capital and receiving 2-4% yield on that capital, but to experience the compounding effect, you need to invest at least 5 years, but probably 10 to 15 years to really see results. That's just math and not my opinion.
It's okey to use different strategies, but know what you are buying
We all have different modes of investing styles and different ways to achieve our goals and measure success. My advice to any new investor. 1. Time in the market almost always beets timing the market. 2. Know why you are buying a stock/fund, when the price drops its (and some day it will) if its a sound fundamental purchase than its on sale.
Some people feel safer by doing boring dividend investing:
I feel it’s safer... I carefully pick positions that have excellent growth and a record of no cuts. I look for companies whose products or services I think will be viable for a couple of decades. I look for consistent earnings and market equal or better price growth. I plan on holding forever when I buy them but since I reinvest the dividends I harvest cash by selling positions that have gotten too large. If this stops I’ll just take the dividends I need for income.
Helps you play the long game
Dividends help me maintain my patience which is the real trick to making money.
The power of dividend growth investing
With a true Dividend Growth stock, that a company growing its dividend on an annual basis greater than the rate of inflation has a anti-gravity effect on the stock price as well. Meaning capital appreciation happens as well as growing dividend streams. In the search for great companies, that are true DGI achievers, trading at fair or a discount to fair value you are finding companies that have solid earnings and in turn a great investment (in most cases). By following this strategy, in a sense, safeguards the investor from capital losses due to finding great companies at decent prices to invest in.
In total, people want both. This is often very hard to achieve. Personally, I do this and my readers know that I am patient and conservative buy and hold investor:
I expect to get close to the market return, but probably a less. However, I will underperform in bull markets while overperform in bear markets. I will get a higher dividend return than the market, but the capital application will be higher holding a broad index. I believe that.
That said, I do both, because I think, and all research show this, that it will be very very hard to even beat the index. But, many people fail at holding the index, say if it goes down 5 years in a row. By also using the DGI + Indexing, I will feel progress and be able to continue my journey as a DGI and Index investor.
Submitted September 23, 2018 at 05:42AM by LetsTalkStocks https://ift.tt/2xzwN6D
