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Here's a quote by Benjamin Graham that resonates with me: One of the most persuasive tests of a high-quality (company) is an uninterrupted record of dividend payments going back over many years.
\nDividend investing is one of the strategies that doesn’t hinge on the market’s volatility. Instead, it works quietly in the background, compounding over time and helping you grow your wealth steadily. While it may not sound as exciting as the latest stock trending on r/WallStreetBets, it has the potential to build long-term wealth.
\nSo, in this week’s newsletter, let’s discuss whether dividend investing is worth it, how much you’ll realistically need to replace your income, and my dividend portfolio, which currently generates almost $10,000 a month!
\nFor those unfamiliar, anytime you buy a stock, you’re entitled to a portion of that company’s profits. Sometimes, these profits are reinvested into the company for its growth. But sometimes, profits are distributed regularly as dividends. This dividend is nothing but a fixed amount that each share pays out, usually every quarter, and the percentage return is based on the stock’s current trading price.
\nFor example, if a share pays $5 a year and is trading at $100, the current dividend yield is 5%. The dividend yield can fluctuate depending on the stock price. Not all companies pay dividends, but those that do are often more mature, where reinvesting capital into growth no longer provides as high a return. Depending on the company, dividend yields can range from 1% to 10%. This type of passive income can be one of the most straightforward and predictable forms of cash flow you’ll ever generate. For instance, here’s the dividend growth chart of Coca-Cola from the year 1997:
\nSo, from an investment standpoint, dividends provide regular, predictable cash flow without requiring you to sell shares. This means you have more income to reinvest in other opportunities. However, just like any investment strategy, you must consider its advantages and disadvantages. Here are some points I considered before investing in a dividend-yielding stock or ETF.
\nNow that we have considered the pros and cons, here’s how to optimize your portfolio for dividends.
\nWhen investing in dividends, it’s essential to think long-term. While you might want to chase high yields, consistency is key. This is exactly where dividend aristocrats come in. These are S&P 500 companies with over 25 years of consecutive dividend increases. Historically, they outperform during recessions and continue to grow their dividends.
\nThe average dividend aristocrat yields between 2% and 3%. If you aim to replace an income of $50,000 a year, you’d need approximately $1,670,000 invested in a basket of these stocks, assuming a 3% yield. Achieving this could be done by investing $5,000 a year over 40 years, while reinvesting dividends. And remember, apart from the dividend yield, the stock/index also grows over time. This can increase your returns by an even higher margin.
\nFor those looking for higher yields, there are alternatives like covered call ETFs such as JEPI, which can yield up to 10.7%. While this option provides substantial income, it comes with the risk of limited upside potential during bull markets and potential downside if the market drops. This method could potentially replace a $ 50,000-a-year income with just $500,000 invested, but it’s not without its risks. Here’s what I do:
\nIn terms of my personal portfolio, I currently receive close to $10,000 a month from three main sources:
\nLiving entirely off dividends is achievable, but it requires careful planning and a diversified portfolio. While dividends offer great benefits like predictable income and tax advantages, they also come with risks, like the potential for dividend cuts or stock price declines.
\nFor anyone looking to replace their income with dividends, it’s essential to think long-term and be mindful of the risks involved. Dividends can be a great addition to a well-rounded investment portfolio, but they shouldn’t be the sole focus unless you’re close to or already in retirement.
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That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)
Stay safe, stay invested and I will see you next week – Graham Stephan.
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\n113 Cherry St #92768, Seattle, WA 98104-2205
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A 33 year old real estate agent and investor with over $120M in residential real estate sales. This is my way of sharing actionable ideas that will make you a smarter and wealthier investor.
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A 33 year old real estate agent and investor with over $120M in residential real estate sales. This is my way of sharing actionable ideas that will make you a smarter and wealthier investor.