I love being a hands-on dividend investor and picking individual stocks along the way. Reading stock market news every night before bed gives me great pleasure.
However, most people don’t want to spend this much time and effort to get great returns from the stock market.
Everyone needs income for retirement, so what can more casual investors do to meet their money goals while saving time for other matters?
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Welcome back to the Income for Retirement Series (Preferred Shares, Closed-End Funds, Mortgage REITs), where we give you the time and income you desire.
Let someone else invest for you. Sure, you can turn your money and resources over to a financial advisor or money manager; however, there is another way.
Dividends ETFs give you a bundle of dividend growth stocks in one security. You can dollar-cost average into these ETFs and build a massive dividend growth investing portfolio.
What is Dividend Growth Investing? Dividend Growth Investing (DGI) is the art of investing in dividend-paying stocks that grow their dividend payments over time.
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Four powerful techniques combine to make DGI an extraordinary method to achieve your income goals through retirement.
- Dollar-Cost Averaging: You invest a set amount of money into stocks weekly or monthly.
- Dividend Reinvestment: You reinvest your dividends until you are ready to retire. Then you reinvest 25% as you take the rest to enjoy.
- Dividend Increases: Great companies increase their dividends yearly, helping you beat inflation.
- Share Price Appreciation: Over time, the stock prices of great companies usually rise, giving you capital appreciation.
These four techniques can change your life when taken together. However, it takes years for your portfolio to appreciate and pay you the income you need.
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Income Investing vs. Dividend Growth Investor. I am a hardcore income investor, but I also have an excellent dividend growth portfolio.
Income investors want their money now, at the expense of share price appreciation. Reinvesting dividends is the best way for income investors to grow their cash flow continuously.
Dividend growth investors receive natural capital appreciation and dividend increases; however, reinvesting most of their dividends is the best way to prepare for retirement.
That is why DGI investors usually start investing at younger ages (say 30s, 40s, and 50s). This gives their portfolio time to grow and compound.
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What are Dividend ETFs? Dividend ETFs do a lot of the DGI work for you by investing in blue-chip dividend growth stocks.
Instead of investing in 20 blue chip dividend stocks, you can dollar-cost average into Schwab US Dividend ETF (SCHD).
On the surface, SCHD looks like an S&P 500 Index Fund (SPY). However, when you dig deeper, you’ll notice all the stocks in SCHD pay dividends—no growth stocks like Tesla (TSLA) or Nvidia (NVDA).
With no growth stocks, SCHD’s dividend yield is much higher than the S&P 500. However, the 3-4% yield on SCHD pales in comparison to my regular income investing products.
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As an income investor, why would I invest in Dividend ETFs? The total return (capital appreciation and dividends) of Dividend ETFs is high.
When I combine a closed-end fund like PDI with SCHD, I capture the magic in a bottle. Dividend ETFs can give me the growth I desperately need in my income portfolio.
Also, most Dividend ETFs pay qualified dividends, which will reduce my tax burden. High-income products usually pay unqualified dividends, which the government taxes at the ordinary tax rate.
Dividend ETFs vs. Treasury Bonds. Most retirees want to protect capital at all costs, which pushes them to high-yield savings accounts, certificates of deposits, savings bonds, and Treasury Bonds.
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Investing this way is acceptable for their 1-2 year emergency fund, but they still need growth. Dividend ETFs can provide great capital appreciation while yielding almost as much as Treasury Bonds.
Retirees will rely entirely on interest payments to survive without a growth element. The government taxes all interest payments at the ordinary rate.
Both federal and state governments tax interest on certificates of deposit, significantly reducing their yields.
Usually leverage with Dividend ETFs. We never want to sell shares of any securities to provide income; we want to live on dividends.
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However, we can leverage the capital appreciation of our Dividend ETFs without selling shares. We can take a loan against our holding to handle any matters that arise.
Taking a loan against your Dividend ETF portfolio is great because you do not generate a tax scenario—reducing your overall tax burden.
For example, you may have invested $100,000 in SCHD over the years, but it is worth $200,000 and pays $20,000/year in dividends.
If you need $10,000 for a home renovation, you can take a loan (leverage or margin) against your portfolio at 7-8% (current rates).
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Understanding how to leverage your money gives you a leg up on things that happen in life and during retirement.
Dividend growth portfolios and Dividend ETFs are better products to leverage against than income investing portfolios.
Income investing portfolio prices are too volatile and depend too much on current interest rates and commodity (oil & gas) prices.
Conclusion. I save a place in my income investing portfolio for Dividend ETFs. They provide my rainbow during gloomy times.
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I do invest in individual DGI stocks like Procter & Gamble (PG), Costco (COST), McDonald’s (MCD), and Starbucks (SBUX).
However, I invest heavily in SCHD and DHS because they give me an entire index of DGI stocks, ensuring I capture the whole segment.
If you are new to investing and want something a little deeper than index funds, Dividend ETFs may match your style.
Dividend ETFs do a great job of explaining how they create their indexes and what companies they package together. I have nothing but good things to say about great Dividend ETFs. Good Luck!
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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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