When to adopt dividend investing?

Dividend investing is a powerful strategy and can be of excellent option to generate recurring income. I would also argue it can be alternate and a easier way to get recurring income in place of rental properties. Dividend investing as a strategy has some pros and cons; Adopting this strategy would depend on person to person, it comes down to the question - Are you excited about solely focusing on dividends? Is that what you want out of stock market?

What is Dividend Investing -

Dividend is a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). Dividend investing is to buy stocks that pay dividends to get recurring income.

Pros of dividend investing -

• You can diversify extensively as your prime goal is to get the dividends.

• You will get a lot of opportunity to average down

• Business might increase dividends as time goes buy, thereby increasing your yields

• Advantages of qualified dividend on taxes

• Reinvesting dividends can amplify your returns over a long run.

Cons of dividend investing -

• The amount of capital that needs to injected to get some reasonable recurring income is very high.

• The companies that pay good dividends are often at a mature stage of their lifecycle. The growth ahead in that particular business might not be the most exciting one.

• Your risk/reward of investing in stock market is not reduced by following this strategy.

• Your dividends can be cut or eliminated if the business face financials difficulties.

• Dividend investing returns take a very long term to show results.

Why dividend investing might not be the right choice for beginners?

If you are in your 20's, 30's, 40's or even early 50's and have 10+ years of runway in stock market investing. Investing in growth/value company might give to good ROI over near to mid term. Businesses that reinvest their revenues for further product and service development could produce faster returns for you than a company that is giving away proceeds to shareholders.

Note - Some of the value/growth businesses pay dividends but might not be match the dividend aristocrat yields. (Assumption - any business that pays less than 2% div yield is not considered as a dividend stocks for this article).

Chasing dividends might be harmful as the companies with high dividend yield might not be able to sustain the dividends and would have to either cut dividends or borrow money to pay dividends during downturns. This might also slash their stock prices as a cut or reduction would make the dividend investors flee the given stock.

Example:

Let's look at a example with 10 year timeframe in mind -

• Annual Contribution - 1200 (100 per month)

• Dividend Yield - 5 %

• Share price Appreciation - 3 %

• Dividend Reinvesting - Yes

• Tax Rate - 15%

• Year Invested - 10

Here is a split up of what you can expect in 10 years -

Returns stats -

Given the fact that the inflation would be above 2% in next decade. The Avg annual return of 4% isn't that exciting for me as an investor. But if you look at a 30 year range or further the returns might move to 7 to 10% per year and might look okay.

You can try any dividend calculator online and play around with numbers - https://www.marketbeat.com/dividends/calculator/ .

How much I would need to retire of dividends?

Example: Suppose you need $5000 per month for monthly expense in your retirement then you need to have $1,500,000 invested in dividend stocks.

Calculation -

• Annual requirement = $5000 * 12 months = $60000

• Based on 4% rule of retirement, multiply annual requirement by 25 = $60000 * 25 = $1,500,000.

Conclusion:

If you are just starting or have 3 to 5 years of investing experience; I would gauge the runway you have and choose strategy accordingly. Choosing value/growth may give returns thats beyond your imagination in a relatively short amount time. And when you achieve the retirement amount thats required for your situation you may choose to switch to dividend investing and enjoy dividends.

I will end with my quote on this topic -

"You can retire on dividend investing but dividend investing might not be enough to get to retirement" ~ Vimal David