Thursday, September 10, 2015

Is time spent learning dividend investing worth it? (Part 2)

This is the second and final part on the article from Tuesday. Please refer to the first part that was posted on Tuesday.

I believe that most of the accumulation of knowledge with dividend investing is upfront. This means that the time spent learning about a company such as Johnson & Johnson (JNJ) is in the initial phases of the research process. Time spent updating the story should not take nearly as much time as the time to learn about the company initially, Dividend investing is appealing, because after spending time accumulating knowledge about a company, and building a portfolio of good ones at cheap prices, I am essentially getting paid a growing amount of dividend for decades afterwards, even if I don’t lift my finger after that.

With a passive portfolio of dividend paying stocks, you are going to save a ton on annual management fees. If you bought mutual funds, even low cost index ones, you can end up paying tens or hundreds of thousands of dollars in fees. Even a 0.10% annual fee could be a lot when you manage say $1 million today or $10 million one day. As discussed above, if you use a financial adviser, you would end up paying at least 1% for the "advise" and the high fee mutual funds that go along ( or maybe even pick up some costly annuity) But if you learn how to invest your own money, and devise a plan to accomplish your goals, you will save a ton in costs. If you stick to your plan through thick or thin, you will be able to accomplish your goals. For the do it yourself dividend investor, there are ways to minimize commissions to the minimum, so theoretically it is possible today to buy blue chip stocks for practically no cost and hold them for decades. This is essentially what an index fund on the  S&P 500 index fund does. It holds stakes in well-known companies such as Exxon Mobil (XOM), Apple (AAPL), Johnson & Johnson (JNJ), Coca-Cola (KO), but it charges an annual fee for this service. Since those companies are well-known, I have found it easier for me to just buy them outright and avoid paying the annual management fee. The only place where I actively invest through index funds is in my workplace 401 (k) plan. For the majority of workers out there, who confine their investing to their workplace 401 (k) plan, low cost indexing is possibly the best approach due to tax efficiency and employer match. Even then, learning about types of contributions and plans, minimizing fees, investment options available, and asset rollovers, can be tremendously beneficial.

The most important reason to do it yourself, is especially if you are a dividend investor. This is because the goal of every dividend investor is to generate a stream of income from their capital, that will pay for their expenses in retirement. This dividend income stream is built from a variety of companies that are properly valued, have sustainable dividend payouts, and have managed to grow earnings and dividends over time. I am not privy of any product out there, that can provide a one size fits all approach to income investors. Most dividend focused funds or dividend focused ETF's have not managed to grow annual dividends for at least five years in a row, since they are subject to high investment turnover. This is why I don't use dividend ETF's in my investing. I also don't like mutual funds and ETF's because I do not want to be at the mercy of a manager or a committee, which can change the portfolio strategy or relax quality standards on a whim.

By studying market history I had learned that stock prices can go nowhere for up to a quarter of a century. I also learned that the amount and timing of future capital gains to be unpredictable. I learned that dividend payments are much less volatile, as they tend to gradually go up every year. The only exception over the past 90 years were the Great Depression and the Great Recession. If you get a 95% success rate ( defined as dividends growing in a given year or mostly flat for the year), that is good enough for me. This means that a strategy where the investor lives off only on the dividend income produced from the portfolio, is safer than selling off portions of your portfolio. When you are retired, you need a stable source of cashflow that will meet or exceed the bills you have to pay each month. This is where dividend growth investing has definitely helped in evaluating how prepared I am for financial independence. At present time, my forward annual dividend income can cover somewhere between 75% - 80% of my annual expenses. I expect this to meet or exceed my expenses around late 2018.

When I invest $1,000 in a company like Johnson & Johnson (JNJ), I can generate $32.80 in annual dividend income that is very likely to grow above the rate of inflation over time. If I earned $20/hour from my day job, this means that for every $1,000 I invest in a company like Johnson & Johnson, I earn enough passive dividend income to allow me to work one and a half hours less per year. This means $32.80 less in annual income that I need to worry about. With each $1,000 I put to work, I see immediate increase in annual income contributions from my portfolio. If you learn to accumulate income producing assets that way, you will be able to achieve your financial goals, where passive income exceeds expenses. And if you do that, then spending time learning about dividend investing wouldn’t be a waste now, would it?

To summarize, I am a very big proponent of investing time to acquire knowledge about investing. This knowledge has paid off for me big time for me in:

1) Increasing my earnings potential as I become an employee with more marketable skills
2) Cutting unnecessary costs like adviser fees, taxes, management fees
3) Made it easier to network with other like-minded individuals
4) Made it possible to identify investment goals and work my way towards them
5) Could help me transition into another role in the future that could generate even more income for me

I believe that those who choose to increase investment knowledge over time will increase their odds of achieving success. The future payoff will not always be easily quantifiable at the time of acquiring the knowledge. However, taking a risk and acquiring this knowledge will increase the probability that a favorable outcome is accomplished. Plus, learning is fun, and can make life much more enjoyable.

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