So I decided to write an article on how to invest in dividends because it seems like a lot of people, especially younger investors who are still accumulating their net worth, think that the only way to make money in the market is through growth.
They couldn't be more wrong. Growth is a great way to make extra money in the market, but dividends are a key component to building wealth through passive income.
Growth VS Dividends: A Comparison
Before I go into detail about how to invest in dividends, it's important for readers of this blog (and investors as well) to understand the difference between growth and dividend investing as well as why one option may be better than the other depending upon your goals.
This will help you determine which investment strategy you should follow and lead you down the right path.
Dividend stocks include stocks like:
They tend to be mature companies that generate huge amounts of free cash flow.
This is the money that the company has left after all expenses and reinvestment in capital expenditures.
These companies typically do not reinvest in their businesses like growth companies, but rather return it back to shareholders in either dividends or share repurchases.
A lot of investors think that dividend investing is only for retirees who need income to live on, but that's simply not true.
Dividends can be a great way for younger people to diversify their portfolios and generate a nice amount of passive income each month which will build up over time as you continually add new shares into your portfolio using dividend reinvestment plans (DRIPs).
It takes discipline to invest this way because instead of putting money into a position you want to take profits because you do not want to be holding a stock that does not increase in value. But if you can make it work, dividends are a great way to accumulate wealth over time as well as slowly build up your passive income portfolio.
Growth stocks include companies like:
They tend to be younger companies that reinvest all of their earnings back into growing their business through research and development, marketing campaigns, and building new factories.
These companies typically do not pay shareholder dividends but buy back shares on the open market which increases the value of existing shareholders' stake in the company.
This strategy allows investors who understand growth investing to generate huge returns over time through capital gains as the business matures and becomes more profitable.
What growth investing doesn't do, however, is generate regular income for shareholders which dividend investors will enjoy as part of their passive income portfolio on a monthly basis.
Why Dividends Are Better Than Growth For Younger Investors
So if growth investing allows you to make crazy returns on your money over time, why would anyone invest in dividends?
Wouldn't it be better to just reinvest all of my earnings back into the companies I want to see grow over time?
The answer is yes, but only if you have the luxury of being able to wait decades for these investments to mature and grow into large positions.
In most cases, young people who are trying to accumulate their net worth don't have that kind of patience. We want investments that we can add to overtime and not have to wait 2-3 decades for our money to grow.
And that's why dividends are a great option for younger investors who want to get started with investing because you can reinvest small amounts of money each month into your positions which will build up over time into a huge passive income portfolio that will generate hundreds or even thousands of extra dollars every month during retirement.
Not only do the companies mentioned above offer a nice yield of around 2% per year on average, but they also raise their dividend payouts each and every year which makes them even better stocks for building wealth over time using DRIPs.
And since they all tend to be mature companies with large market caps, they offer plenty of opportunities for dividend reinvestment programs that allow you to buy more shares over time using the dividends you receive which will compound your returns over time.
Why Young People Should Invest In Growth Stocks
Now before I get a lot of angry comments from younger people who are trying to build their net worths and don't have the extra cash flow to invest in mature companies with high yield payouts, let me clarify something real quick: There's nothing wrong with growing your wealth through growth stocks.
Investing is a personal choice that depends solely on what type of investor you are. Some people prefer dividend investing because it gives them a nice passive income stream every month while enjoying the long-term capital gains that come with buying shares in businesses that continue to grow over the years.
Others prefer growth investing because it allows them to accumulate wealth at a much faster rate using pure capital gains on the price appreciation of the business through time by reinvesting all of their earnings back into growing their positions larger and larger each year.
And that's why young people who are just starting out should consider allocating some (not all) of their investment capital to growth stocks like Tesla, FB, Google (GOOGL), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), etc.
If they want to get rich quickly, this is how you can do it.
Many investors doubled or tripled their money in these companies over time because they were growing faster than the economy, the industry, and/or their competitors.
And since these types of stocks tend to be volatile over shorter timeframes (weeks or months), it's also how you can get rich quick for less than you might think.
All it takes is some patience and discipline to ride out the ups and downs while you wait patiently for your winning investments to rebound back towards all-time highs so that you can unload them into the market at an even greater profit down the road.
How Young People Can Get Rich Quick With Growth Stocks
For example, if a young person was able to invest $1000 of his or her money in Amazon stock back in 1999 around $6 share when it first went public, he would have been sitting on roughly $500,000 worth of shares today which is about a 500 times greater return on capital than what he could have earned through investing in some boring dividend stock like Coca-Cola (KO) at the time.
And even though these types of gains are difficult to see over short timeframes like 5-10 years, people who bought Google during its IPO in 2004 around $100 per share (now ~$2,816), Microsoft during its first year as a public company (~$15/share vs ~$299.87/share now), or Apple back, when it was still making iPods (~$8/share vs ~$1+/share now), would all be-millionaires if they kept their stakes intact.
It takes a lot of patience and discipline, but it's how you can get rich quickly for relatively little money if you know what you're doing.
And since growth companies tend to offer over 100% gains over shorter timeframes, the high risk associated with the demands that most younger people have at least some portion of their net worth allocated towards these types of stocks along with dividend payers as well as more traditional investments like bonds or treasuries for income stability.
For another example, if a young person saved $1000 per month (under age 35) or $2000 per month (over age 35), he should consider investing roughly 20% into growth stocks like Tesla Motors Inc (TSLA), Facebook Inc (FB), Google, Amazon.com Inc (AMZN) and even risky companies like Apple, Twitter Inc (TWTR), etc., roughly 20% into dividend stocks for safety and income stability, and the remaining 60% into more traditional investments that provide a little bit of growth as well as yields such as bonds or treasury notes.
And since young people tend to have time on their side because they're decades away from retirement, this is how you can get rich quickly without breaking your neck. All it takes is enough patience and discipline to hold onto a simple portfolio of high-yielding blue-chip dividend stocks along with some safer growth companies for years or decades at a time while reinvesting all dividends back into the market through either an index fund or individual securities.
How Young People Can Get Rich Quick With Dividends
For the reasons described above, I personally recommend that a good portion of a young person's savings should go towards dividend stocks for safety and income stability even if it means taking on more risk from non-dividend-paying companies with higher growth rates as well as marijuana stocks which have been growing like crazy lately. After all, you're decades away from retirement so why not take greater risks now when you have time to recover from any losses?
For example, if someone saved $1000 per month (under age 35) or $2000 per month (over age 35), he should consider doing this:
Put roughly 20% into high-yielding blue-chip dividend stocks like Johnson & Johnson (JNJ), PepsiCo Inc (PEP), Procter & Gamble Co (PG) or Coca-Cola, 20% into high-yielding mid-cap dividend stocks like Frontier Communications Corp. (FTR) or AbbVie Inc. (ABBV), another 20% into lower-yielding large-cap dividend stocks with strong competitive advantages like International Business Machines Corp. (IBM) and Disney, roughly 5% towards riskier growth companies that pay some kind of yield, and then the remaining 35% towards growth stocks without dividends that have greater potential for capital appreciation such as Facebook, Google, Tesla Motors, etc.
Of course, if you're more conservatively inclined, you can put 50% of your money into high-yielding blue-chip dividend stocks like Verizon, AT&T Inc. (T), Chevron Corp. (CVX), Johnson & Johnson, PepsiCo, Procter & Gamble, Coca Cola, 2% into mid-cap dividend stocks like Frontier Communications Corporation, 5% into lower-yielding large-cap dividend stocks with strong competitive advantages like International Business Machines Corporation and U.S Steel Corp . (X) to play it safe along with 35% towards growth stocks without dividends that have greater potential for capital appreciation.
With the money left over after buying shares of some blue-chip and/or "old economy" type companies that pay out high dividends or yield in excess of 4%, you can then put the rest into fast-growing companies like Google, Facebook, Apple, Amazon, Tesla Motors, etc.
But just because you have a windfall or are able to save up money each month doesn't mean that you should blow it all on risky high-growth stocks.
Rather than sinking all your savings into one sector like marijuana stocks or gold stocks which may be overvalued at the moment, take a more balanced approach by investing in established companies with big market share and brand names along with some growth companies for diversification purposes to reduce risk while still being able to get rich quick through dividend yield.
However, if you can afford to do so without taking out a loan or maxing out credit cards, don't even bother investing in individual dividend stocks unless you enjoy the process of researching and analyzing companies for fun on a rainy day.
Instead, purchase ETFs or index funds like VTSAX ( Vanguard Total Stock Market Index Fund ), VOO (Vanguard S&P 500 ETF), VTI (Vanguard Total Stock Market ETF), and/or VYM (Vanguard High Dividend Yield ETF ) instead while including some marijuana stocks that pay dividends at well-established Canadian companies such as Canopy Growth Corp, Aphria Inc ., OrganiGram Holdings Inc . etc.
You may also wish to consider Gold ETF's or Phsysical Gold to ensure your investments are diversified.
If you're over the age of 59, I'd highly recommend looking into a Gold IRA with Goldco as well.
Feel free to Request their Free Gold Investing Kit, in it you'll discover secrets you can use to protect your retirement savings from dollar collapse, inflation, and liberal government policies.
The reason why I recommend the aforementioned index funds coming from Vanguard is that they don't charge commissions to buy or sell which allows your investment dollars to go further than if you had to pay $7-$10 per transaction when purchasing stocks or ETFs on Robinhood.
For doing so, you can simply go to Vanguard.com, create an account, set up automatic contributions out of your checking account each month, and purchase some VTSAX which is one of the cheapest broad-based index funds with a 0.04% expense ratio.
Even better is that if you're over age 50, you can contribute up to $24k per year (or $23k if you already have at least $1600 in your account) into Vanguard's VTSMX rather than the regular VA SAVIX all without having to pay any fees or commissions whatsoever.
In the meantime, you'll be able to slowly build your net worth from scratch without taking on too much risk along with getting dividend income from various stocks you buy either through VTSAX or individual companies.
However, if you can't afford to invest $7k per year into index funds like VTSAX while having to pay $7-10 for every transaction made on Robinhood or other commission-based brokerage firms while still prioritizing paying off debts then I recommend starting out by investing in bonds, CDs (certificate of deposits), guaranteed investment certificates (GICs) which are essentially bond plus CD hybrids.
If you're trying to get rich quickly through dividend yield or capital appreciation, then index funds are definitely the way to go while having some growth stocks in your portfolio just in case they do get taken out at a premium by savvy investors.
But if you can't afford that, start out small with CD ladders, invest $50-$100 monthly into GICs and/or bond funds (ex: VBH or FVC) ideally while still making monthly contributions towards emergency savings accounts for unexpected expenses along with putting money towards your debt snowball until it's gone before moving on to other investments like individual dividend stocks and index funds.
Otherwise, you'll risk running out of money should something bad happen like losing your job or getting diagnosed with cancer which is why you need to be financially prepared.
Disclaimer: I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.