Just Be Passive

SOURCE: http://www.portfolio-adviser.com/w-images/ed7c21c4-4a77-4d1e-ab82-9dde0835e709/2/2016700activepassivesign-640x410.jpg

SOURCE: http://www.portfolio-adviser.com/w-images/ed7c21c4-4a77-4d1e-ab82-9dde0835e709/2/2016700activepassivesign-640x410.jpg

I see a lot of traders out there that think they can be the next Tim Sykes and retire on a portfolio that they built from mere pennies to a small fortune. While I applaud the dream, and will never shun someone for dreaming big, I would like to redirect your mindset a bit.

First a few questions:

  1. Are you trading for a living ( aka, no other job)?
  2. Are you able to watch the market from pre-market until the end of after hours?
  3. Do you have a nest egg that allows you to lose everything in your account?

If you answered no to any of the following then let me present you with another option: Passive Dividend Investing. 

When it comes to the stock market there are really just two different types of those buying stock. The first are those that trade constantly and are actively working to increase their portfolio gain. The second are those that invest and leave the money to grow, checking in ever so often to make sure their money is being protected. I have been both and let me tell you something; being a trader while having another job is pretty much impossible. Those of you that think you can do this will soon learn that you are either losing money or getting stressed to no end by small gains and losses that could have been avoided by timing issues caused by your real job.

Passive Investing, Active Research

If you like to be active in the market then passive investing can still be for you. What I mean by this is there is still a lot to do for someone in terms of researching the next purchase, analyzing quarterly and annual reports, and reading about various news developments that may effect a company's long term well being. Passive investing can actually end up taking more time than being a trader.

Wait, I thought you just said passive investing is great if you have another job?

While the above statement is true that doesn't mean that it won't take time and research. The difference is that your time and research is no longer spent during the hours of 7am to 9pm but instead can be done whenever it fits your schedule. No longer is time an enemy but quite the contrary, time is now your friend.

Didn't buy Apple before they jumped to a new high? No problem there are other great companies out there that are still undervalued (not saying that Apple is overvalued). There will be other days for the companies that spike, and there will be better days for a lot of the companies that get crushed. This is why passive investing interests me so much.

The research needed to find a winning company, one that will not only still be around in 10 years but also will be thriving and profitable, takes up an enormous amount of time. This also takes a lot more skill then simply following a chat room, using scanners, or even looking at the technicals. Don't get me wrong, all of the prior are still skill sets that people have developed over time but nothing is as complicated as actually picking long term winners.

Didn't you say dividends?

The next part of the discussion is another one of my favorite things, free money. That is exactly what a dividend is, the company pays you to hold their stock. This not only makes your pockets happy but also helps to stabilize the price of the stock. Add in a DRIP program and you can basically gain tax free shares, add consistently to your dividend income, and get richer while doing nothing.

What is dividend income?

Dividend income is pretty simple. It is the income that your dividends give you each year. That is it. If you take a look at my current dividend income you can see that I am bringing in almost 500 dollars a year just for holding stock!

What's the catch?

Well here is where the dividend investing game can get a bit tricky. Companies that pay dividends can come in many shapes and sizes, some risky, some safe, and some downright boring. What company will still have a dividend and also a rising stock price in 10 years can be tough to put a finger on, but that is why I love it. There are constant puzzles that need to be pieced together, all the while giving you a sweet pile of cash each year. 

Why should I switch to this type of investing?

When we all start to trade or invest we think about one thing; getting rich. If you thought about anything different then I would really like to hear about it so maybe I can see what I am missing. Anyways, when it comes to getting rich the easiest way is to constantly place your money into something that will increase your return year after year for long periods of time. When it comes to dividend investing there may be nothing better.

Let's take a look at what happens when you invest in a dividend yielding company that consistently grows.

Below is what can happen to 1000 dollars over 20 years. This was derived using a dividend calculator from: https://www.dividendinvestor.com/dividend-calculator/
(Assumes dividend reinvestment, 3.3% starting yield, 5% annual growth rate, 100 shares at $10 starting price).

Source: https://www.dividendinvestor.com/dividend-calculator/

As you can see this type of investing could literally pay dividends (sorry for that) over a long period of time. What began as 1000 dollars now pays you almost a quarter of that in annual income for absolutely free! Take that slow growth strategy with 100k and you will end up with 25k in dividend income while doing nothing but sitting back and relaxing! For most of us that means retirement without ever having to dip into savings!

If you think the above statement is unrealistic then think about this: the numbers above actually projects the stock to stay at the same price for the entire twenty years. This is unrealistic!

How many companies actually do this though?

Currently there are 52 dividend aristocrats (25+ years of growth) available in the S&P 500. They can be found here:  https://en.wikipedia.org/wiki/S%26P_500_Dividend_Aristocrats

wrap up

While there is great fun in being an active trader I believe that there is still plenty to be found in dividend investing. Begin studying, reading, and actually investing where riches will grow without you having to take up the market as a second job.

I hope that you found some enjoyable and educational reading in this article that will push you forward in researching dividend investing. Remember that I would rather be sitting on a beach then sitting on a computer, and that is truly what passive investing could be all about!