If you’re like I was several days of research ago, you’re a complete and utter newbie when it comes to investing for dividends, you’ve come to the right place. I’ve been looking and looking for ways to make my money start working for me more easily. So, I’m going to break this down into three different approaches: slow, fast, and balanced.
The Turtle’s Race
We all know that old fable of the Tortoise and the Hare. And we all know that it’s certainly not true in all instances that the tortoise wins against a faster creature. Often, the faster creature isn’t as easily distracted as the hare was. The real moral is that you have to keep going toward the finish line until you reach the finish line , not that slow and steady wins the race.
So, how does one invest the slow but sure way? Well, you pick a couple good old companies that have always paid dividends for years and years, and have always increased their dividends, year after year. Then, you buy as many shares of those as possible, get the DRIP (or Dividend ReInvestment Program) if they offer it, and keep plowing money into them every month or payday, however you want to structure it.
Just guessing off the top of my head here, but you’ll probably find that KO (Coca-Cola), PG (Proctor and Gamble) and McDonald’s are the best ones to go with, unless things in their sectors change drastically for some reason. You’ll eventually have enough money coming in every quarter that you’ll be able to live off of it. But it will take a long time, so start immediately.
The Hare Fights Back
Here is what I originally would have subscribed to, if I hadn’t found it incredibly difficult to do so. The point of this approach to investing for dividends is speed. You want to buy as many high-yielding shares as possible, that pay dividends as frequently as possible, and have all the money from dividends going back to buying more shares of stock. I calculated that at 15% annual yield (which basically means you’re buying everything on sale) compounded only yearly (which is far less often than you’ll find to be common) with a yearly investment of $12,000 , you’ll have enough shares of stock to give you an average monthly dividend of about $3000 in 10-15 years. (That calculation was done using Dave Ramsey’s investment calculator)
Now, I’ve seen suggestions of REITs (Real Estate Investment Trusts), Oil trusts, MLP (Master Limited Partnerships), and Canadian Trusts, but aside from Oil and REITs, I’d suggest beginners stay away from these. From what I’ve seen, MLPs are nightmarish when it comes to tax forms, and Canadian Laws changed recently, so you’ll have to pay tax in Canada AND the US if you’re living here. Stick with REITs if you don’t know what you’re doing.
The problem with this is that you have to watch more carefully than with the Turtle’s approach, because you have to get your yield to stay at 15%. I think that’s a fair price to pay, as long as you know what you’re looking for. Once I find someone who can explain that clearly to me, I’ll be able to break it down much more easily. The only real problem here is that you need to seriously educate yourself for this approach to work, and you have to put in $1000 every month until you’ve hit your goals.
The balance will get you where you’re going…eventually. You’re going to get there because you can see that it is smart to keep investing in consistent dividend payers over time, and you’ll also actively seek to more rapidly increase your holdings through faster yielding stocks. The big talking heads on the televisions will talk about diversification to protect yourself, but let’s face it: stocks are stocks are stocks are stocks. Having a bunch of different stocks isn’t going to help you if the whole market crashes.
That is what I’ve learned, so far about investing for dividends. Either play it slow, watch your companies constantly, or have a nice balance. As a disclaimer, I own none of the companies I have talked about at the time of this writing. I’m planning on taking a position in KO, BAMM, and possibly O, if I can get it on sale. I still haven’t decided on a couple others, but I do know that I’m not done researching dividends stock. You should take a position of act, research, act, repeat as well.