So Why Dividends?
The Investing Environment has the flu
It has occurred to me that I dived into the heavy content a little early here and perhaps I need to take a step back and explain why an average investor should be at least as interested in dividends as they are capital gains.
Everyone is interested in capital gains. Ok, wait – capital gains are the difference between when you buy a stock at $10 and sell for $20. You made a capital gain of $10 per share. This is what 90% of the investing media concentrates on and as a result I believe our investment culture is a little sick with the ‘trader mentality’.
Investing in stock used to be all about being a part owner in an enterprise – presumably one that made money and who’s future prospects were good. People talk about ‘buy and hold’ investors as a sub class of investing – but what is the point of buying something that you don’t want to hold?
We all go to work to receive an income from our employer. We exchange our time and talents for money. Personally I want the need for myself to be part of this exchange – my time and talents for my salary – as soon as possible. To do that I will need income. I am an income investor, really & dividends are a key part of that income. Bonds just aren’t doing it right now but they may make up a part of that equation in the future as well. Like most people I don’t have a defined benefit pension to rely on for retirement. I need to invest to produce my own income so I no longer need to exchange my time for a salary – Financial Independence.
Financial independence is the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income and/or cash flow from dipping into the assets that is at least as great as their expenses.
The common person
If you don’t have a defined contribution pension plan and want to be financially independent – then you should be learning all you can about investing. You need to understand what type of person you are. You need to realize that leaving all of your money in a savings account, bonds, GIC’s etc is going to make it very difficult for you to realize the freedom that you want. You need something that is going to pay you income – ideally increasing income over time. You also need to understand the incredible power of compound interest.
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest.
Whatever way thy choose to invest (and don’t get me wrong, dividend investing isn’t the only way to invest) your investments must provide you with cashflow such that it covers your expenses. That is what you need to do. This is the goal, your Shangri-La.
How to do it? Everyone knows all about Facebook, Google, Twitter, Instagram etc – well there are other internet platforms that are available now that are just as powerful and easy to use – discount brokerages. With these amazing interfaces you are able to invest in the most power companies in the world. The world of capitalism is literally right at your fingertips. There is a lot to learn but the first thing is to realize that you have the power to control your future. I don’t care what you do for a living, what interests you have – literally everyone should have an interest in pursuing financial independence. It is scary to me that I feel the need to state that everyone should be interested in their own financial independence but I know there are many people out there who haven’t given it a thought in their lives. How much more amazing would our society be if people took financial independence as seriously as they take Facebook?
If you have come here you obviously have given it at least one thought – hang on to it. It’s not nearly as intimidating as it may seems. There is a TON of information that you can learn – you literally could never know it all but relax and know that you can invest in boring companies that make a ton of cash – and they will literally share that with you.
When you buy stock you become an owner in that company
Thats amazing isn’t it? You are an owner. You need to think like an owner. The money you have scraped together to invest didn’t come easy and if Proctor and Gamble want you to become a part owner (and they do) then you should be thinking: We’ll see – but the ownership position better be a paid position. Do you want to become an owner of a company on a volunteer basis? Hell no – but a surprising amount of stock owners do just that. They volunteer their capital in the hope that at some point in the future another person will want to purchase their stock at a higher price than they paid.
Doesn’t that sound crazy to you? I mean, I heard of volunteering for a charity car wash, helping out at the SPCA, serving food at the soup kitchen or volunteering with Big Brother & Big Sisters – but volunteering to work for VISA for example? Hell No! If you want me to be an owner it is a PAID POSITION and dividends are the salary.
Think Like an Owner
I want to be an owner not an employee. When I am financially independent all of my income will be because I am a big enough owner that the owner salary (dividends) will be large enough that I no longer need my employee salary. Sounds lovely doesn’t it? Having the most talented business executives in the world working their tails off to pay me – the owner (and their boss) a salary. Keep it up boys & girls! One Dad is a very demanding owner.
I will be using this blog to reach out to you and show you how to think like an owner. How to be paid like an owner and how to be financially independent like an owner. What a truly magnificent thing Free Enterprise is!
Remember, there is more to being financially independent than investing – we will also cover expenses, saving & debt but if you can think like an owner – I mean, really get it – then you have already won.