Why We’re Building a Dividend Portfolio

Why We’re Building a Dividend Portfolio

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Why We’re Building a Dividend Portfolio

To be a successful investor, you certainly don’t have to be the smartest person in the room. You do, however, need to ensure you aren’t making your investment decisions emotionally. A lot of investors get into trouble when they get too emotionally involved. For example, investors might get caught up in market-euphoria and make a rash investment decision or they might liquidate a substantial portion of their investment portfolio by panic-selling when the market is down.

I like to think of myself as a very level-headed individual (sometimes even to the point of annoyance according to Nicole). As difficult as it might be to admit, I occasionally let my emotions get in the way of my investment decisions. It doesn’t happen often, and I always vow that it will be the last time, but it nevertheless happens again. In our experiences, one of the best tactics we’ve implemented to combat emotional investing is building a portfolio of dividend-paying stocks.

Dividends Help Us Tune Out Market Volatility

There is a quote from Mark Twain I am quite fond of that reads, “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” I like this quote because it does a superb job of illustrating just how volatile the stock market can be. Thankfully, because of the inherent characteristics of dividends (that I’ll explain below), building a portfolio of dividend-paying stocks is a great way to help ignore market volatility.

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Due to the way dividend payments are made, the amount of dividends received by an investor is determined by the number of shares owned, not the price of those shares. Therefore, as long as we maintain the same number of shares, market volatility should not impact the amount of dividend income we receive. Even when the value of our portfolio declines severely (as was the case when it fell by over 30% earlier this year) we should still receive the same amount of dividend income. Let me note that in times of extreme economic uncertainty, some companies might decide to reduce or cut their dividends entirely, which would certainly reduce our dividend income. This is one of the reasons it’s important to understand a company’s financial situation before making an investment.

Dividends Provide a Great Reference for Progress

As I’ve mentioned before, Nicole and I are striving to replace a portion of our income with dividends so that Nicole can have the option to work part-time after we have our first child (if she wants to of course) and so we can both have the option to retire early. Focusing on the amount of dividend income provided by our portfolio instead of the portfolio value itself is a great way for us to monitor our progress, almost regardless of the market conditions. Typically, the share prices for companies that pay dividends typically move less wildly than the share prices of other companies. Thinking about it, this absolutely makes sense. If a company is going to pay investors to simply own their stock, why would investors sell it, especially if they believe in the company’s success over the long run?

***If you’ve ever been curious about what I’m looking for when I make an investment, check out the What’s in Stock series. Through eight weeks, the What’s in Stock picks have increased our annual dividend income by over $585!

Additionally, if you want to see how my wife and I are using our portfolio to build wealth and one day become millionaires, check out the Millionaires in the Making series where I share, discuss, and educate you about the trades I make in our $300k portfolio.

To make sure you don’t miss out on any new videos, be sure to subscribe to the Nicholl for Your Thoughts YouTube channel and enable your notifications!***

 Get Raises for Doing Nothing

When we make investments in dividend-paying stocks, we’re typically looking for companies that will increase the amount of their dividend payments in the future too. What’s better than getting paid to do nothing? Getting paid MORE to do nothing. It’s not unusual for a company to raise the amount of their dividend by 5% or more annually. Just to provide some reference, let’s assume that you plan to buy one share of a company that trades for $100 and has a dividend yield of 3% ($3 annual dividend / $100 share price). In the first year of ownership, you would earn $3 in dividend income from that investment. However, thanks to the help of compound growth, in year two you would receive $3.15 in dividend income from that same investment. In year five you would anticipate to earn $3.82 in dividend income and in the tenth year you would expect to earn $4.88 in dividend income. If we take a look 30 years after the initial investment is made and the company maintains their 5% annual dividend growth rate throughout that time, you could expect to earn $12.96 in dividend income for the year!

We love the idea of receiving raises on the amount of dividend income we receive each year for no additional effort on our part. If you think receiving a raise at work as recognition for your hard work feels rewarding, something tells me you’d love the feeling of a dividend raise too!

Your Thoughts

What are your thoughts on dividend investing?

If you have any suggestions for future blog posts or questions about your financial situation, please use the Your Thoughts page to reach out.

Be sure to subscribe to the mailing list so you have a chance to win future giveaways and so you don’t miss out on future content.

If you’ve ever been curious about what I’m looking for when I make an investment, check out the What’s in Stock series. Through eight weeks, the What’s in Stock picks have increased our annual dividend income by over $585!

Additionally, if you want to see how my wife and I are using our portfolio to build wealth and one day become millionaires, check out the Millionaires in the Making series where I share, discuss, and educate you about the trades I make in our $300k portfolio.

To make sure you don’t miss out on any new videos, be sure to subscribe to the Nicholl for Your Thoughts YouTube channel and enable your notifications!

Your thoughts are worth more than a penny.