A Dividend Investing Strategy
Most people make the biggest mistake of their investment lives by overlooking dividends.
And it's easy to see why.
Due to the prolonged bull market which took place from the early 1980's to the early part of this century, dividend paying stocks earned a reputation for being slow-growth, stodgy old has-beens of the business world.
Who could make any money with those?
And who would want to?
After all, that tech company started by the teenager down the street didn't pay a dividend, and the stock increased 100-fold in two years!
So who wouldn't choose a return like that over a boring old industrial that rose only 8% in price and paid a paltry dividend. Right?
It's exactly this train of thought which fosters the myth that dividends play second fiddle to rising stock prices.
Yet, nothing could be further from the truth...
According to Jeremy Siegel, author of "Stocks for the Long Run" and "The Future for Investors," over the past 100 plus years, dividends have accounted for 97% of real investor returns in the stock market...
"From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."
Still think dividends are boring?
Or do you think maybe dividends deserve a second look...
An Upside Down Mentality
This misperception of dividends, coupled with memories of past bull markets, lures a lot of investors into viewing the stock market 180 degrees opposite of how they should.
Such a misguided mentality insists the following is true...
A rising stock market is good, while a falling stock market is bad.
But is this really true?
How could it not be?
Most people think it is. Including the experts.
And, of course, the experts know what they're talking about. Right?
Let me ask you this...
When the price of food goes up, do you celebrate?
After all, you probably have a pantry full of food, and all that food just skyrocketed in value. So sell it, and live like a king!
You plan on buying more food in the near future?
So what you're telling me is lower food prices aren't necessarily a bad thing.
Now, if that's the case for food, let me ask you another question...
Aren't you planning on buying common stocks in the near future?
Of course you are. Otherwise, you wouldn't be reading this.
So isn't it a good thing when stock prices are low?
Of course it is.
Yet, millions of people continue to base their financial lives on a failed theory ? The Theory of the Greater Fool. They buy something at a certain price today, and then hope and pray a greater fool will come along and pay a higher price for it tomorrow.
This is a sure path to financial ruin.
It's my hope that once you've learned these lessons, you'll never again fall prey to that line of thinking.
Keep reading, and you'll find out why...
Why Dividends Are Important
Dividends are a sign of strong cash flow. They're also a hallmark of a real business.
Accountants can fudge earnings. They can game the income statement with smoke and mirrors.
But paying a cash dividend is a whole lot harder to fake.
Outside of an elaborate Ponzi scheme, a company needs free cash flow to pay a dividend to shareholders.
So when a company pays a solid dividend, it's extremely unlikely it's the next Enron...
You know what else is great about dividends?
Dividends are a sign of good management.
When a company pays you a dividend, you can be certain management is not wasting that cash on poor acquisitions, elaborate executive parties, or empire building. Paying a regular cash dividend is a sign that management remains focused on maximizing shareholder value.
And it's important for management to view the company as shareholder property rather than a personal corporate playground...
A Surefire Way to Make Money in Any Market
You want to know another reason dividends are great?
Dividends are also a surefire way to make money in any market environment.
Whether the stock market is up or down or sideways, if you own a slice of a business paying a regular dividend, you're certain to have more cash in your pocket at year end.
And that sounds good. Right?
After all, more cash in your pocket is the whole purpose of investing. So instead of hoping it happens, why don't you make sure it happens...
Dividends Transform Stocks Into Assets
Remember our "Rich Dad, Poor Dad" definitions for an asset and a liability?
If not, here's a refresher...
"An asset puts money in your pocket."
"A liability takes money out of your pocket."
Now, apply these definitions to a common stock.
Is a common stock an asset or a liability?
Think about it for a minute...
You might say a stock sold at a loss is a liability, and a stock sold at a gain is an asset.
But I'm not talking about selling. Remember, selling isn't an option.
You want to own great companies, not sell them.
You can make plenty of money without selling.
So ask yourself one more time... Is a common stock an asset or a liability?
The answer is clear, yet it flies right over the heads of 95% of the investing public...
If a stock pays a dividend, it's an asset.
Because according to our definition, an asset puts money in your pocket... And a dividend paying stock definitely does that!
Now, remember what Robert Kiyosaki says is the key to getting rich?
It's the same principle which leads to great wealth in the stock market...
Buy assets, not liabilities.
It's really that simple...
The Compounding Power of Reinvested Dividends
Think of this simple idea and its implications for your Roth IRA.
Buy assets, not liabilities.
If you collect assets (dividend paying stocks), then every quarter they'll put money in your pocket.
But if you collect non-assets (non-dividend paying stocks), then your future wealth is completely beholden to the whims of the stock market. If the price of your stock goes up, great... But what if the market never recognizes the value of your company?
Can you afford to waste years of your life hoping and waiting for your stock holdings to increase in price?
Of course not.
So why bother? Reap the rewards of owning a great company by collecting dividends now.
Most discount brokers now offer an option where Roth IRA accountholders can reinvest dividends free-of-charge. This is a fantastic option, and I take advantage of it myself.
If you automatically reinvest your dividends, each quarter you'll accumulate more fractional ownership interests in the great companies you've already researched. Your wealth will grow like clockwork, and you won't have to worry about whether or not the stock market is up or down or sideways...
Doesn't that sound like a better option?
As an added benefit, reinvesting dividends automatically takes advantage of dollar cost-averaging, meaning you acquire more shares when the market is down and less when the market is up.
And, of course, the icing on the cake is if the price of your company?s stock ever does take off into the stratosphere, you've spent years accumulating more and more shares without investing a single penny in additional funds!
Changing Your Mentality
If you buy into great companies trading at great prices which pay out regular quarterly dividends, your Roth IRA operates on autopilot, slowly accumulating greater and greater amounts of wealth.
It's almost like you're investing in an interest-bearing savings account, except in this case, the interest rate steadily increases over time. Accumulating more shares gives you a claim on the new shares' portion of quarterly dividend payouts, and over time, as the dividend payout rises and you accumulate more shares, you might find yourself receiving a dividend larger than your original investment!
So how does this change your current mentality?
When you invest like this, you want the stock market to go down!
Because you want to buy great companies at great prices...
You don't want to buy great companies at high prices.
So instead of praying for the market to go up, root for the market to go down so you can buy more shares of great companies at lower prices.
If that's your goal, why would you ever root for the stock market to go up?
Who cares if the stock market thinks your company is worth less than you do?
The stock market's mistake is your opportunity...
Think about it. If you want a sweater, and Wal-Mart advertises a sale for 50% off that particular sweater, won't you run out to Wal-Mart and buy it?
Now, suppose Target advertises the same sweater for 10 times Wal-Mart's price, will you run out to Target and buy that sweater?
Not when you can you get the same thing at Wal-Mart for one-tenth of the price...
So why do people engage in the exact opposite behavior when it comes to the stock market?
95% of investors panic and sell when prices are low, and then eagerly buy when prices are sky high...
It makes no sense...
So don't be like those 95%!
You're a net buyer of stocks, not a net seller. So root for low stock prices.
But wait, you say!
What about retirement. Won't I be a net seller then?
Why would you?
Again, 95% of the investing public has the wrong idea. They spend an entire lifetime accumulating assets, or at least what they believe to assets. Then, in retirement, they sell off these assets in order to pay bills, hoping and praying through the entire process that they don't outlive an ever-dwindling retirement nest egg.
Does that sound like the right approach to you?
If you've spent your entire life collecting ownership interests in great companies trading at great prices and paying out quarterly dividends, then why do you ever need to sell?
Why sell off your assets?
Only people in bankruptcy should be forced liquidate assets. You should be building them!
If you collect great companies trading at great prices and paying out quarterly dividends, you can pay your bills in retirement with the regular and steady cash flow generated by your dividends.
You won't need to sell assets to survive.
Your financial house will reside on a rock solid foundation, complete with brick walls and a steel roof.
Only those who've built their financial houses out of straw (that is, a hope in increased stock prices) will be forced to sell their investments in order to survive.
Here's hoping for their sake that the market offers them a decent price when that time of desperation finally arrives...
Now that you've learned about the importance of dividends, let's examine an important dividend measurement - the dividend payout ratio...
Learn about the Dividend Payout Ratio >>>
Return to the top of A Dividend Investing Strategy
Return to Trading Stocks In A Roth IRA
Return to the Your Roth IRA Website Homepage
Read 5 Reasons Why I Love My Roth IRA, our part in the Good Financial Cents Roth IRA Movement!
Start planning ahead for next year by checking out 2017 Roth IRA contribution limits, and stay alert to this year's changes to the 2016 Roth IRA contribution limits.
Our family fully funds our Roth IRA with this website. Learn how you can do it too.
Are you confused or frustrated by the stock market? Learn how to build real wealth selecting individual stocks for your Roth IRA...
Read more about what's new on the Roth IRA blog.
Hi, I'm Britt, and this is my wife, Jen. Welcome to our Roth IRA information website!
This is our humble attempt to turn a passion for personal finance into the Web's #1 resource for Roth IRA information. But, believe it or not, this site is more than just a hobby. It's a real business that provides a stable and steady stream of income for our family. In fact, because of this site, Jen is able to be a full-time stay-at-home mom and spend more time with our daughter, Samantha.
But you want to know the best part? ...You can do the same thing! Anyone with a hobby or a passion (even with no previous experience building a website) can create a profitable site that generates extra income.
If you're tired of solely depending on your job(s) for family income, click here now and learn why our income is increasing despite the financial crisis and how we're making our dreams come true.
Search This Site
Roth IRA Basics
More About Roth IRAs
Roth IRA Resources
About Your Roth IRA
Like Us On Facebook
Follow Us On Twitter
[?] Subscribe To
The information contained in Your Roth IRA is for general information purposes only and does not constitute professional financial advice. Please contact an independent financial professional when seeking advice regarding your specific financial situation.
Our family started this site as a labor of love in February 2009, a few months after our daughter was born.
Thank you for helping it become one of the most visited Roth IRA information sites.
Thank you, too, to the "SBI!" software that made it all possible.
We hope you find what you're looking for and wish you much continued success in your retirement planning!