Note from Karim Rahemtulla: With interest rates at all-time lows, more and more investors are turning to dividend income to make ends meet.
Unfortunately, most investors look to one number when they decide which stock to gamble on: yield. And make no mistake, when you’re “chasing yield” that’s exactly what you’re doing. Gambling.
The dangers of chasing yield are similar to investors getting caught in a value trap with stocks. Investors see a cheap stock and completely ignore a company’s fundamentals.
With dividends, investors see companies paying out yields of 10% or more – and can’t resist.
There’s certainly money to be made investing in dividend stocks. But it’s critical to pinpoint only the companies that can dole out dividend payments consistently.
And that’s where my colleague, Marc Lichtenfeld, comes in. Marc’s new book, Get Rich with Dividends, shows you how to structure a portfolio of dividend-paying stocks from start to finish.
I’m happy to turn the reins over to Marc today, who is about to show you how profitable dividend investing can be.
People have always said that my son’s an “old soul.” Perhaps that’s because he’s never been as wild as most boys. He’s contemplative, serious and has a long attention span.
A few years ago, I showed him how to play poker. (I figured someone has to pay for his college education. So it might as well be his fellow students.)
He got into it. And as I was writing my book, Get Rich with Dividends, he was annoyed that I was so busy. My work was eating into his poker time. He finally asked me what the book was about. So I taught him a bit about the stock market.
Once he understood the basic concepts, I explained to him the power of dividends. More specifically, how compounding dividends can triple your money or produce extremely high yields in a matter of years.
Being the practical kid that he is, he asked me how much money he would have for college if he invested his money according to the strategy in my book.
When I calculated it for him, his jaw dropped. “Will I really have that much money in eight years?” he asked. I told him there were no guarantees. There’s always risk in the market. But I felt confident he’d have plenty of cash when he gets to college. That’s because we’d be investing in conservative stocks and using a strategy that makes money over the long term – regardless of whether the market goes up or down.
The key is to buy a stock with a decent dividend – and reinvest that dividend to buy more shares. This generates more dividend cash to buy even more shares, which racks up higher dividend payouts… and so on.
You eventually get to a point where it doesn’t really matter what the stock price is doing. You still make money no matter what. In fact, a dip in share price can work in your favor, since you can reinvest your dividends at a lower cost.
In the end, the results can be mind-boggling.
For example, shares of ConocoPhillips (NYSE: COP) are down 4.5% from 10 years ago. But if you’d purchased $10,000 in shares and reinvested the dividends, your holdings would now be worth $27,923.
Meaning you would have nearly tripled your money, regardless of the 4.5% loss.
Better yet, when you eventually need the income (instead of reinvesting it), the yields will be incredibly strong.
For example, say you invested $10,000 in BHP Billiton (NYSE: BHP) 10 years ago and reinvested the dividends. And today you decided to start taking the dividends in cash instead. Your annual income from the stock would be $2,400, or 24% on your original investment.
But what if you need the income today and can’t wait 10 years? No problem. Just invest in stocks that I call “Perpetual Dividend Raisers.” These are companies that consistently raise dividends each year.
Altria Group (NYSE: MO), for instance, has raised its dividend every year since 1968.
Over the last 10 years, the company increased its dividend an average of 11.6% per year.
Now it yields 4.75% – nearly triple that of 10-Year U.S. Treasuries. And as long as it maintains the same rate of increase, in a decade, shareholders will enjoy a yield of 12.8%.
Ultimately, this allows you to generate a decent amount of income today, while ensuring that you stay ahead of inflation at the same time.
I don’t know of a more potent moneymaking tool.
My 11-year-old is already well on his way to financial independence. Not because he has that much money right now, but because he understands how to use basic strategies to make his money grow.