Month: September 2022

What are dividends? There can be a lot of things when we think about it. When you put in work that is finally starting to pay off, as the old saying goes, that hard work begins to pay dividends. But what about when we are talking about stocks? Well, the same principle applies here.

When we work hard, save our money, and decide to invest, dividend-paying stocks and funds will reward us for all those years of hard work. They reward shareholders by paying them a share of the company’s profits. Companies like this usually don’t see exponential growth in their stock price, but instead slow and steady appreciation over time. Therefore, these companies use their excess cash to incentivize investors to forgo the growth they may find in other stocks, providing compensation, as well as a steady price.

Dividends are a powerful tool for investing. Perhaps no one knows this better than Warren Buffett. The Berkshire Hathaway founder is a famed dividend investor whose firm regularly receives eye-popping amounts due to their investment in companies like Coca-Cola. For example, for the 400 million shares Berkshire owns, they will receive quarterly dividend payments in excess of $650 million. That’s the power of dividends to an extreme.

However, dividend investing is just as powerful for the everyday investor as it is for Warren Buffett. Let’s explore how.

What Are Dividends?

As mentioned above, dividends are a share of a company’s profits, paid to shareholders of the stock. Many people think of companies like Coca-Cola, Bank of America, and even Apple who all pay a small dividend. Are those companies making so much money that they are giving it away? Well, not technically. Investors must purchase shares of the fund or companies to be entitled to these payments. In exchange for holding the security for a long time, thereby assisting in a stable stock price, the company distributes an amount of money to each shareholder based on the number of shares they own.

It’s not just stocks like those above that pay dividends either. There are all sorts of ETFs (Exchange Traded Funds), Mutual Funds, as well as REITs (Real Estate Investment Trusts) that investors use to increase their income or compound interest.

The beauty of dividend investing is the optionality it gives you. Between pocketing the money, helpful for those who need it like people in retirement, and the compounding interest of reinvesting your dividends, the fruits of your labor will pay off.

ETFs are very common ways for investors to gain exposure to various dividend-paying investment vehicles. Instead of putting a large nest egg into one company for their dividend payment, the investor can reduce their risk by investing in a basket of these stocks. The fund manager picks the stocks based on things like past performance, dividend growth over time, and dividend payout ratios.

REITs are another very common method for this strategy, only instead of paying shareholders from profits of selling a product or service, these dividend payments come from the rent paid by the properties owned by the fund manager. These are a very reliable source of dividend income as they are paid monthly and real estate is a very necessary part of life, so there’s little worry about not receiving these payments.

Why Invest In Dividend Stocks?

As Einstein once said, “compounding interest is the eighth wonder of the world. Those who understand it, earn it… those who don’t… pay it.” Take a 25-year-old who invests $100 a month in something like a Roth IRA for 40 years and earns a 12 percent annual return, for example. When that person retires at age 65, their investment will be worth just over $1 million. If the same person were to start investing $100 per month at age 35, they’d only have around $300,000 by the time they reached 65. That’s the power of compounding.

This is especially true when talking about long-term dividend investing. When you invest in stocks that pay you dividends, you have the option to invest the payment directly back into the stock. Over time, you will begin to earn returns on those returns, your position grows as do the gains on your original investment. Factor in stock splits, and after a few decades you may have a position that rivals that of Warren Buffett himself, we can only hope.

For retirees, dividend income built up over a long career can help supplement your loss from no longer working. This can make a huge difference in maintaining quality of living throughout retirement. These regularly paid dividends give these shareholders peace of mind, knowing they can rely on these payments to live off of.

How To Invest?

As we mentioned, there are many ways to start your dividend investing journey. Start by researching the various funds and stocks that allow you to take advantage of this key to wealth creation.

There may be a lot of noise out there, but make your life easier by starting your search with Magnifi. By searching “Dividends” you are well on your way to discovering all the world of dividend investing has to offer.

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The information and data are as September 9, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.