Jean is a dividend growth investor… Let’s talk about why.
When purchasing stock in a company, you technically become a part-owner of that business. Therefore, if other investors see value in that business, they also buy shares of the stock, increasing the price of the stock and in turn increasing the value of the share you own. This is capital appreciation. Capital appreciation is great, but what about companies that pay dividends on top of that? What if you reinvest those small payments? What if they increase every year? This is what most people really mean when they say “Compound Interest”. It is a thing of magic.
A dividend is a share of a company’s profits that they return to shareholders on a quarterly or monthly basis, usually in an effort to maintain shareholder interest. If I own 1 share of X stock and it is valued at $100 per share with a 4% dividend yield, I will be paid 4$ in passive income during the year, in 4 equal payments of $1. It doesn’t sound like much, but as you buy more shares… you get more in dividends… and as you get more dividends… you reinvest them… and as you reinvest them… you get more dividends… and as the dividend increases… you reinvest more… Do you see the cycle here? Many call it a dividend snowball effect. The end result hopefully being a significant amount of truly passive income (Getting paid to do nothing, at all). The good news is that most companies in the S&P 500 are reliable dividend payers, and many have 50+ years of consecutive dividend increases regardless of market conditions. Imagine never having to sell-off your portfolio to pay for your life in retirement? It is certainly possible if you adapt the proper strategy during your investing journey. If you have a $1,000,000 portfolio in retirement with an average dividend yield of 5%, you would receive $50,000 per year in passive income without selling a single share. Dividends can either be taxed at the Long-Term Capital Gains tax rate, or as Regular Income Tax, these are known as “Qualified” or “Non-Qualified” Dividends. Qualified dividends come from owning shares of a company, whereas non-qualified dividends come from certain ETFs and REITs which are less common.
Dividends are accessible to everyone, they are usually tax advantaged, and they truly compound if you reinvest them. They don’t teach you these things in school, but Jean is happy to educate you. When building your portfolio, consider adding some dividend growth ETFs or BlueChip companies with long sustainable histories of rewarding their shareholders. You will thank yourself later. As always, do your own research.