Autumn is creeping upon us, and what better time to start investing? The leaves are turning orange, the weather is becoming cool, and our wallets are preparing for the busy Christmas season.
Wouldn’t it be nice to have our dividends pay for Christmas shopping next year? In the article “A $1000 Dividends Shopping Spree,” I talked about my wife and I using dividends for our Black Friday shopping this year. Dividends are an amazing way to build wealth, fund expenses, and splurge on luxuries.
Goals. Investing can help you achieve many goals that you might have in life. The hardest part of investing is knowing where to start. Luckily, I have many books and articles on the topic. Everything I talk about, I also do myself. The only exception is trading options because I need more shares available before I begin.
The Magic of Dividends
Before I get into the different types of investing, let’s review your goals. Having an end state is the most critical part of the process. Where do dividends fit into your overall retirement plan? How much do you need for retirement? How long do you have before you plan to retire?
These questions will help you form an opinion about your investing process. Remember, things will change as you learn and evolve, but you need to know where to start. A good example will be if you plan to retire overseas on dividends by age 50.
If that were the case, and you are currently 40, you may need to become an income investor. The “How to Start Dividend Investing 101” series discusses more investing mindset and goals. Don’t worry if you don’t know exactly where your path leads; just guess.
For example, you can decide that having a $1,000/month dividend income to support your video game habit would be nice. Next, you pick your timeline—and tada! You have an investment goal.
Paths. Having a goal is great, now we need to pick a path to follow. There are almost an infinite amount of ways to invest in the stock market. I am going to condense them down into three different approaches.
Diversify Your Passive Income
Of course, each path can have branching routes and extra modifiers—so don’t feel like you have to conform to a direction 100% of the way I present. The three investment styles I follow are income investing, dividend growth investing, and index fund investing.
Income Investing. Investing for Income is when you seek immediate returns from your securities (stocks and ETFs). Usually, income investors look towards high-yield products that give more of their gains through dividend distributions.
Some of the high-yield products I use for income investing are preferred shares, real estate investment trusts, closed-end funds, dividends ETFs, and business development companies. When I invest in these products, I am looking for immediate income, usually the next month.
For example, if I invest $10,000 in the closed-end fund PCI (9% yield), I would receive $75/month. In ten years, without reinvesting, my $10,000 would still be worth roughly $10,000 to $11,000. However, I would have received $9,000 in dividends. Most of my returns would be in the form of dividend payments.
Prepare for Inflation
With income investing, I can use those dividends to fund my lifestyle and expenses. I can also use excess cash flow to reinvest in more income products or dividend growth stocks. I have many options when I have cash flowing from dividends.
Of the three, income investing is the fastest way to see your returns. However, high-yield products do not hold up very well when interest rates rise—just something to remember.
Dividend Growth Investing. The idea behind dividend growth investing is to buy dividend-paying blue-chip stocks for the long term. These stocks pay dividends that they also increase over time. Between the stocks appreciating, dividend reinvestments, and growing dividends payments, DGI is a compounding powerhouse.
DGI is the slowest of the investing methods. It will take years to feel the effects of compounding your dividends. However, in time you will come to appreciate the income that a DGI portfolio will produce. Let’s explore.
Let’s put our $10,000 into McDonald’s stock at the current price of $246. We will reinvest all dividends for 30 years. We predict that the stock price will appreciate at 3% a year, and they continue to pay a 2.5% dividend.
Dividends vs. Royalties part II
In 30 years, my portfolio will be worth $49,800. My payout will be $1,245/year or roughly $103 per month when I stop reinvesting dividends. Not bad for a $10,000 one-time investment.
However, you unlock the power of DGI when you keep contributing. Let’s start with $10,000 and add $200/month for the next 30 years. Now we are looking at $223,000 and $5,575/year. That is $464/month of dividend income.
With DGI, you let the blue-chip stocks and the power of compounding do all the heavy lifting. I like to use DGI on top of my income investing tactics. I can use my DGI income for nice-to-have items.
Index Fund Investing. Index fund investing is, on the surface, the easiest choice for investors. You invest in one of the four indexes that dominate the market. They are the total stock market (VTI), S&P 500 (SPY), Dow Jones Industrial Average (DIA), and Nasdaq (QQQ).
My favorite index fund is VTI. The idea of index fund investing is to simply keep investing into these index funds for all the years until retirement. I would start by investing as much as possible into my Roth IRA because the returns will be tax-free.
Pay Down Debt or Start Investing?
Very few people have ever beat the stock market’s returns over a consistent period. So, in essence, you are getting maximum returns by just investing in the stock market index. Let’s say the stock market averages a 9% return over 30 years.
If we invest our $10,000 and add $500/month for those 30 years, we would finish with $950,000. The question now becomes how to use this money. I don’t like index fund investing because you have to sell your ETFs to produce income.
Yes, if you have a Roth IRA, the sales would be tax-free, but that still sucks. I would sell my index funds after they reach an all-time high and buy income products, like closed-end funds.
Let’s say we walked away with $650,000 after taxes and put that into my favorite closed-end fund, PCI. At a 9% dividend yield, I would be receiving $4,875/month in income.
You’ll Need $20,000/month Passive Income
I do use index funds in my portfolios, but only as a growth accelerator. I do not plan on selling them in the future. Index funds seem simple, but withdrawing them will be very complex. You will need to know how to invest by that time, so you may as well learn now.
Conclusion. So what’s the best of the three methods? I have no idea; that’s why I use all three. I love having my hands in all of these pots and watching my portfolio grow over time. However, I spend a lot of time reading and writing about my portfolios.
- How to Start Dividend Investing (book)
- How to Choose Your Stocks (book)
- The Pro and Cons of Dividend ETFs (Free PDF)
- Let Dividends Be Your Lighthouse through Retirement (book)
- Blue Chip Stocks (book)
- The Woman’s Guide to Investing (book)
- The Magic of Dividend Growth Investing (Free PDF)
- Why Do I Need to Start Dividend Investing? (book)
Building a dividend income stream is a fantastic way to add revenue to your life; however, don’t take it lightly. Keep reading and following my blog. I also read Seekingalpha every day to see what’s happening in the world of investing. I’ll leave you with a few short books to help you get started with investing for dividends. Enjoy and Happy Investing.
- PDF of the Month: Don’t Gamble with Retirement 3+4 (696-Page Free PDF)
- Free PDF Downloads: Download FREE PDF books here (Twitter Link)
- Financial Mindset: Become CEO of Yourself (book)
- Retirement Planning: Don’t Gamble with Retirement 4 (Free PDF)
- Investing: The Pros and Cons of Dividend ETFs (Free PDF)
- Cryptocurrencies: The Magic of Cryptocurrencies (Free PDF)
- Real Estate: Real Estate is a Mindset (Intermediate) (Free PDF)
- Business: Retire Rich, Retire Comfortable with a Business 2 (Free PDF)
- Everything!: The Biggest Book on Passive Income Ever! (book)(Web Edition)(Art Edition)
- I bought a Kindle Oasis: Check it out Amazon
- Read My Books for Free: Free Kindle Books Schedule
- Sign up to Access our “Hidden” Free Kindle Book Schedule
- My first Children’s book: A Child’s First Book on Passive Income (book)
- Book Reviews: 54 Takeaways from 54 Books (book)
- Want to Build Passive Income from Books and Affiliate Marketing? (Learn here)
- Writing: Can Grammarly Make You a Better Writer? (direct)
- My Favorite Chromebook: The Ultimate Chromebook (direct)
- Follow us: On our Facebook Page and Join our Facebook Group
- Amazon Author Page: Check out my author page on Amazon
- Monthly Dividend Planner: Check it out on Etsy
Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. 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. All Right Reserved Military Family Investing
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