Dividend investing is a great investment tool, and any investor who avoids it would be a fool. Dividend investing gives you the opportunity to maximize or even upgrade the speed at which you compound your investments. I feel like dividend investments and dividend stocks are not talked enough about among us investors, so in this article i will dive deeper into dividend investing, and give a more detailed article on dividend investing and how it can provide financial freedom…
What is dividend investing?
Dividends are payments a company makes to share its profits with its shareholders. They are usually paid on an annual basis, and this is one of the ways an investor can make returns from its investment. And when it comes to dividend investing as a strategy, then investors usually invest an amount into a company to be able to be paid annually.
An example of how this could work is if you were to invest 10,000$ into Coca Cola. Then Coca Cola would pay you 290$ annually, because Coca Cola has a dividend yield of 2.9%.
So, a lot of investors invest in stocks like Coca Cola because of the stock’s dividend yield, so the investors could make passive returns on its investments
One of the most known strategies that gives the best return over time is investing in solid companies that pays a good dividend yield, and then reinvesting the profits from the dividends back into the company, therefore enlarging the number of shares which then again enlarges the number of dividends which the investor would earn. So, easily said reinvesting dividends maximizes the compound effect of both returns on the investment itself and the amount of dividends which would be paid out the next time.
An example would be: Let’s say John has 10,000$ invested into Cola and gets paid 290$ annually. Now, John reinvests the dividends (290$) back into cola, and now has 10,290$ invested into Cola. The next time Cola pays out its dividends to shareholders, John will get paid 298.41$, which is an additional 8.41 dollars from the last payment. But if John did this strategy over 30 years, his 10,000$ would be worth 23,575.52$. And that’s considered if the stock price of Cola stayed the same over 30 years. So, if you invest money into a very decent company every month or so and the company goes up in value over time, you reinvest the dividends. Then you will essentially maximize the power of compounding with that investment.
Now, of course you should not be putting all your money into one company, but rather diversify into several decent companies that pay a good dividend yield. With this strategy you would be diversifying your portfolio and maximizing the power of which your money can compound in the safest way. (But also remember that you should rebalance your investments every once in a while, so that one investment doesn’t take up most of your portfolio, in this way you can stay diversified throughout time).
When it comes to picking out which business to invest in you should usually go for the type of businesses who have a solid structure to their business and management, bring in a lot of cashflow, have a decent dividend yield and not exposed to a lot of risk. Moreover, when you choose your investment, you must do your research beforehand, and you yourself must believe in the business and what it stands for. It’s like what Warren Buffet said, “when you invest don’t buy stocks, buy businesses”, this essentially means that we investors must come to the realization that its businesses that we invest in at the end of the day, and the stock price should be the last factor you pay attention to, its rather the business itself you must look into, and discover different sides of, like how the structure of the company is, what branch there in, how they generate cashflow, what there finance and capital look like, and so forth.
Dividend investing brings a lot of positive sides, one of them is the possibility of financial independence. What I mean by this is that dividend investing, when done right can bring financial independence by having a big enough portfolio that provides enough dividend yield for you to live off.
Dividend investing is a powerful tool for investors, and every investor should dedicate some of their portfolio towards dividend investing, just remember that a good dividend yield does not necessarily mean that the business itself is worth investing in, so as I have always said and will continue to say as long as I give out investing advice “do your research”.
Now, if you have been a reader of my articles then you would know that I love the book “The intelligent investor”. That is because it’s a must read for investors, so if you want sound advice from an investing expert (Benjamin Graham), then go check out the book, link below
The intelligent investor
Thank you for reading.
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