If you are looking for a way to start small with stock investing and generate huge profits over time, then creating a dividend investing plan can help you achieve that. When it comes to investing, having such a plan is one of the single biggest things you can do to help you avoid mistakes and record big wins.
At some point in our lives we have to retire from active work; the average age for retirement in America is 65 years. Once you get to this age, you are expected to retire from active work and if you didn’t have a good pension plan or investment portfolio during your active working years, you will find it difficult to meeting your basic financial at your post retirement years.
One good form of investment you can start is dividend investment. Dividend investment has to do with buying stocks from companies that pay dividend. This dividend is the profits made by the company from doing business with the money you invested in buying their stocks; and is usually paid periodically; either quarterly or annually. You can even divide to sell your stock portfolio and make massive money from it.
You see, when you invest in a company’s shares, you become a shareholder in the company, and you become eligible to share from the company’s profit or loss. At the end of each fiscal year, if the company has made a profit, this is shared among you and other shareholders of the company based on how much each shareholder invested. Even if the company made a loss that year, you will still get paid; however, it will be from the company’s reserves. The money paid by the company to you and its other shareholders out of its profits or reserves is known as dividend.
Regardless of whether a company’s stock value rises or falls during the previous year, dividends are issued every year in the form of cash or additional stock. If you are entitled to a cash dividend, you have the option of reinvesting it in an automatic dividend reinvestment plan that uses your dividends to buy partial shares at their current price when the dividend is issued. This is known as dividend investing or dividend reinvesting.
Now What is a Dividend Investing Plan?
A dividend investing plan is a financial document that details how you will reinvest the dividends paid to you by a company in which you hold some stock. It explains whether you will reinvest all or a fraction of your dividends to buy additional stock and whether you will make additional cash contributions to buy stock. It also details how frequently you will reinvest your dividends and when the automatic reinvestment will stop.
A dividend investing plan is a cost effective way to put your stock dividends to better use and increase the worth of your investment portfolio over time. It is also a smart way to invest with a small amount of money and to keep investing at periodic intervals while avoiding brokerage commissions. In the long haul, a dividend investing plan will grow your money.
As with any other investment strategy, dividend investing has its advantages and disadvantages. Understanding these will help you make a well-informed decision as to whether you should adopt this strategy or not.
10 Advantages and Disadvantages of Dividend Investing
a. Encourages buying and holding for the long term-: Dividend investing encourages you to stick with your plan rather than sell quickly anytime you sense a possible drop in the stock price or buy high when you get overconfident. So, this investment strategy keeps you from changing your asset allocations at the wrong times (which will most likely happen if your plan is to “sell low and buy high“). This alone gives you peace of mind when the market gets volatile.
b. Passive income stream for life-: Dividend investing produces passive income that tends to rise over time. While every stock is prone to short-term falls in price, there is greater possibility of increasing over the long term. This long-term result is what you will focus on as a “dividend investor.” Your stock keeps growing in overall value without any effort from your end, since the dividends are reinvested automatically.
c. Dividends are tax efficient-: This depends on you, though. If you are in the accumulation phase of life, you may want to favor the option of growing capital gains in an index exchange-traded fund (ETF), which is more tax efficient than dividend stocks because almost all taxes are deferred until the stock is sold. Over the long haul, your will pay more tax as a dividend investor than you will as an index investor.
However, if you are actually living on the dividends, things will change. In that case, if you are investing in indexes, you will be spending a combination of dividends and capital gains. Which approach is better depends on your income level. High incomes and extremely low incomes attract capital gains taxes that are lower than dividend taxes. But if your income level falls anywhere between the two extremes, your dividends will be more tax efficient.
d. Helps create a market bottom-: This is just a short-term concern, though. If a company’s earnings cannot support the dividend it pays to its shareholders, it will eventually cut the dividend. For as long as you believe the dividend will not be cut, the stock price will be held up somewhat, but this can last only so long. Over the long run, the prices of a company’s stocks are determined by its earnings, whether it pays dividends or not.
e. Reduces the risk of selling at market bottom for capital-: While this is true, it doesn’t factor in the fact that companies that maintain their dividends at market bottom are pulling money out of the business during tough times. These are times when retaining earnings is the best option for businesses—either because earnings are down or because excess cash can be used to buy cheap assets. Pulling your money out of a company in the form of dividends in a bad economy is damaging even if you can’t notice any change in your total number of shares.
I. Dividend stocks are difficult to liquidate-: Although some people favor dividend investing because they like to see their investments grow until they are ready to retire or make a large purchase, it is sometimes necessary to liquidate in order to meet current obligations. Unfortunately, however, stock dividend investment plans are difficult to liquidate. While this is possible, most companies have designed various measures to make the process difficult as a way to discourage investors from opting for liquidation.
II. Brokers are not involved-: By opting for dividend reinvesting, you are on your own. Since you won’t be involving any broker, you won’t have to pay broker fees. However, this also means there will be no brokers to help you make investment decisions.
III. Market timing is not possible-: Because your dividends will be reinvested at the time they are issued, you cannot control or dictate the price at which stocks are bought or sold. Even if buying at the time of reinvestment would be a wrong decision, there is nothing you can do to stop it.
IV. Dividend investing is investing without planning-: Since dividend investing happen automatically with little thought given to the process, there is no way you make investment decisions based on your own research and planning.
V. Dividend reinvesting is an opportunity cost-: Dividend reinvesting represents an opportunity cost since the money reinvested for you cannot be spent elsewhere. Dividends can provide income for living expenses or help fund an early retirement, but none of this is possible with a dividend reinvestment. Instead, if you have to pay for something else, you have to first sell shares of stock that were purchased with the dividends.
Why People Fail to Utilize the Opportunity to Invest in Dividend Stocks
- They Don’t Make Enough Money-: Some people claim that they don’t money to invest in the stock market. What they fail to note is that they can start small and grow with time. You can start by buying just 100 units of stocks from the company. When you continue to reinvest your dividends; you will be surprised how much your stock will be worth with the next few years.
- Procrastination-: Some people continue to procrastinate when they will start investing, and what they don’t know is that time is going, as they continue to procrastinate.
3 Reasons Why You Need To Invest In Dividend For Your Retirement Income:
- Passive Income-: Investing in dividends is one of the few passive businesses that will give you passive income a long time after your initial investment, because as you continue to hold your shares in the company; you are entitled to receive dividends from the company. With this type of investment, you are sure of passive income when you retire from active work, and will help to cover for all your financial needs.
- Regular Increase In Pension Income-: Apart from the fact that you will be paid money constantly as long as you are a shareholder in the company, another reason for investing in dividend for your retirement income is that your income will increase as time goes on. Let’s say in invested in a company and you are paid $1,000 the first year as your dividend, as long as the company continues to grow, you can expect as much as $5,000 as annual dividend income in the next 5 to 10 years.
- Less Risky-: Investing in the dividend shares is less risky than other forms of similar investments like the financial market (FOREX) and other commodities; and even if the company goes through a depression, as long as the have good back up plans, they can still recover to make their stock stronger.
With the above in mind, let’s now discuss the steps involved in preparing a dividend investing plan. So, get your pen and paper or open a word processor on your PC, and let’s get rolling.
How to Prepare a Dividend Investing Plan for Retirement Income
1. Understand How the Stock Market Works-: You don’t just wake up one morning and start investing money on any company that offers his or her shares in the stock market. You need to take your time and study how the stock market works. There are some books and online courses that help you get understand the stock market and how to get started in investing in the stock market.
2. Set your goals-: Your first step towards creating a dividend investing plan is to lay out your goals of investing. Since this section of your plan outlines the ultimate results you want to achieve by investing, reading this part each time you are facing challenges will inspire you to keep going on your financial journey.
Your goals must be SMART. That is, they must be specific, measurable, attainable, realistic, and time-bound. The following is a good sample investment goal:
My main goal of dividend investing is to achieve financial independence. To achieve this, I want to create a dividend reinvesting stream of passive income around $40,000 per year. If I expect my portfolio to have a total dividend yield of around 3.5 percent, then I need to create a portfolio of at least $1, 142,813. I would like to achieve this goal by the age of 60.
Your goal might be anything worth setting as a goal. It could be to achieve financial independence (as in the above example), to use your portfolio to supplement your other sources of income, to teach your children or grandchildren the power of investing, or to build a portfolio that can allow you to make annual donations to your favorite charity organization.
You can have more than one goal. And it’s quite normal for your goal to change over time. The most important thing is to set one from the outset.
- Start Early Enough-: This is one mistake most people make, they don’t start saving and investing in their early years. Maybe just 5 years or less before they retire, they start rushing and making much financial mistakes in their bid to cover lost time. You should start investing as soon as you start working in your early twenties. This way, before you get to your sixties, you will be financial free then. The lesson here is that you should start building your investment portfolio as soon as the can.
3. Make a List of Companies to Invest-: Now that you have gotten a real knowledge on how the stock market works and setting your goals, your next step is to start laying out your investing rules and make a list of top companies to invest in. If you can make the choice yourself, you can get a financial advisor to make an unbiased choice of company stocks to invest in. Look for features like the percentage the company pays its shareholders on dividends, a good company should at least 2.5% percent on dividends. How has the company’s dividend increased over the years?
You need to write down your rules for what kinds of companies you want to invest in. However, you must bear in mind that not all companies allow dividend reinvesting, so you need to ensure that the companies on your plan will allow you to execute it.
While it’s quite normal to have many companies on your mind whose stocks are doing fine in the market, it’s highly recommended that you narrow down your list to the barest minimum. Here are some questions you should ask:
- How long does their dividend streak need to be?
- Do you require a minimum dividend yield?
- Do you require earnings to be consistently trending upwards, or can you handle erratic earnings?
- Do you only want to invest in undervalued companies or will you consider fairly valued or overvalued companies, too?
- Do you require a minimum level of dividend growth or minimum earnings growth?
- Do you prefer outstanding shares to be decreasing? What is they are increasing?
In addition, you need to decide whether you will reinvest a company’s dividends into buying additional stock from that same company or you will buy stocks from another company within your portfolio.
4. Carry out More Research-: You have chosen the top companies to invest in, but you need to carry out further research on the companies to confirm your choice. Go on stock forums and financial sites to read other people’s reviews and speculations on the company’s stock.
5. Choose Only Companies That Pay Dividends for a Long Time-: This is one of the tips a beginner should bear in mind when starting out with investing in dividend. There are some companies that pay dividends for just two to five years. Always go for companies that pay their shareholders dividend for a long term; ideal time is between 10 to 20 years.
6. Check for the Company’s Dividend Growth-: I have mentioned this point before, but I wish to point it out once more; a good company should have a noticeable growth in its dividend over the years. For instance, if the company paid an annual dividend of $10,000 to its shareholder for a particular unit number of shares 5 years ago, there should be a significant increase in the present prize of dividend, like $15,000.
7. Plan How Much of Your Income to Invest-: This will depend on how much you earn per week or monthly. If you don’t have many financial obligations like kids to take train, you can decide to invest a bigger chunk of your income in investing in dividend shares, like from 30 percent to 70 percent of your income. Remember to start building your investment portfolio as early as you get your first job.
8. Time your moves-: Whether your dividend investing plan will help you achieve your goals depends on how well you time your moves. Knowing the right time to buy, reinvest, and sell your stocks can make all the different between an effective plan and an ineffective one. More importantly, it is important to explain in the plan, how you will execute each move when the time is right for you to act.
Once you have created your plan, stick with it. Don’t be tempted to do things that fall outside of your plans or moves.
9. Invest In Two or More Companies Stock-: If you have the financial capacity, it is advisable to invest in more than one company at a time, so that if one of the stocks you bought hit the rocks due to depression or any other factor (which rarely happens if you took the time to carry a research on the future of the company), you will still have others dividends to fall back to. Another reason for investing in more than one company is that, you can achieve financial freedom faster from dividends from many companies than concentrating on dividends on just one company to make you rich.
10. Reinvest Your Dividends-: Most companies will give you the option to either withdraw your shares or invest it in buying more shares from the company. Instead of withdrawing your dividends, you can reinvest it and buy more shares from the company. This simple action can multiply your stock value in the company rapidly as you continue buying shares with your dividend.
11. Build Up Your Portfolio-: Building up your stock portfolio simply mean expanding and buying up stocks from other companies that pay dividends to share holders. Don’t ever purchase a stock from a company without doing a thorough research on the company and read speculations from financial experts on the future of the company.
10. Get the Help of a professional-: There are professional financial advisors who’s job is to study the stock market and forecast the further of the stock of each company. You can seek for their services of financial advisors to either help you manage your portfolio or you can seek for their input to help you make a thorough analysis of the stock of a company before you buy the company’s shares. This will save you a lot of trouble like that of investing in a company that is about to hit financial rocks.