Ryan Daniel Moran (Capitalism.com) explains his preferred dividend-investing strategy focused on dividend reinvestment plans (DRIPs). He describes a monthly habit of allocating ~10% of take-home pay into dividend-paying stocks, and his personal buy criteria: a dividend yield around/above 4% and a track record of raising dividends annually for at least 10 years. Using examples (Target, Johnson & Johnson, AT&T) he walks through how annual dividend raises plus reinvesting dividends creates a compounding, accelerating cash-flow stream that can later be switched to income for retirement or other needs.
Questions this episode answers
4% (host's personal buy signal).
Raised its dividend every year for at least 10 years (host's personal minimum).
Allocate 10% of take-home pay into the dividend strategy each month (host recommendation).
Target, Johnson & Johnson, and AT&T.
Chapters
Today, what we're going to break down is the one piece of the dividend strategy that makes this so exciting. It's the fundamental reason why I care about dividend paying stock at all. In fact, dividend paying stock are the one investment that I put money into on a month by month basis.
Build a business, invest the profits. I'm Ryan Daniel Moran and this is Freedom Fast Lane.
What's up everybody? I'm Ryan Daniel Moran from capitalism.com and today we're going to be talking about one of my personal favorite investment strategies. And we're going to be going into what you need to know about dividend reinvestment plans. There is something very, very special and strategic when you get this concept which makes the returns and the cash flow on this strategy super mega sexy. All right, so a lot of people overlook dividends as a means of cash flow because they don't understand this idea that comes from the strategy which is the compounding results of when dividends are reinvested. So it sounds boring, but when we get into the numbers, they're really frickin sexy. Now there are other things that I do in order to raise cash flow in the short term. Things like private placements or I like real estate investment trusts or buying websites or investing in businesses. These are all things that are going to be more of a cash flow win in the short term. And today what we're going to break down is the one piece of the dividend strategy that makes this so exciting. It's the fundamental reason why I care about dividend paying stock at all. In fact, dividend paying stock are the one investment that I put money into on a month by month basis. There's very few times where I'm buying a house every month or I am investing in a new business every month or a new website comes up that meets my criteria every month. But dividends, there is almost always an opportunity for me to park cash on a month by month basis. So a good habit that I practice that I would encourage you to consider is every month taking your take home pay, taking 10% of that and putting it into something that follows a strategy similar to what we are going to go through. Now one other thing before I go into how the numbers break down for dividend reinvestment plans is I have a minimum criteria. This is just me. Okay. My minimum criteria of a dividend is that it pays 4% and that it has raised its dividend every year for at least 10 years now. Why is that the case? Well, the raising the dividend is going to be very, very fundamental for how the numbers play out in this Strategy. But the 4% simply is a buy signal for me. So if we take a stock like Target, Target is a company that, since they're in the retail sector, is suspect or not suspect, but sensitive to news. When Amazon makes an acquisition, Target usually takes a hit. Right. But all the numbers and the fundamentals are there. So I own quite a bit of Target. Full disclosure. And when I know it's time to buy more is when there's news in the marketplace that's scary. And Target drops, and then there's a 4% dividend. So the dividend didn't change, just the price of the stock change. It's like one of my mentors, Travis Sego, says, if you own the goose that lays golden eggs, if they go on sale, you want as many geese as possible. So in this case, if you own a stock that is producing a 4% dividend for me, that meets my criteria of what I'm going to buy a stock, whereas if it's three and a quarter or two and a half, it's just not exciting for me. Quick example and then we'll go into the numbers. Johnson and Johnson is a phenomenal company that I think is really overvalued. And I know this because their dividend, last I checked, was under 3%. So it's just not exciting for me.
If they were a little cheaper, if the economy takes a hit and their dividend stays as it is but the stock price falls, means the dividend payout, percentage wise, is going to be higher if it crosses 4%. It's a company that I would consider now, full disclosure. Johnson Johnson's going through some challenges. So even they were at 4%, I'd be like, I'd be watching them. I'd be holding or waiting a little bit. But that's an example of a company that pays a really predictable dividend for decades, is a solid company at its fundamentals, but just very rarely peaks at that 4% clip. And if it does, I want to go buy it. All right, enough of that preamble. Let's go into the numbers of this. We use the example of Target before. So let's take the example of AT&T as a different example. AT&T tends to trade.
For the last year or so. It's been right around the $30 price point. So let's say you could only afford to buy 10 shares. You've only got $300. So you're taking $300 and getting a 6% dividend or a 5% dividend, which is about where AT&T has been in the last year or so. So it's really hard to justify. Why would I take $300 and buy 10 shares of AT&T when it's only going to pay me, what is that, $18 a year? My math is right, which it usually isn't. But if it's only going to pay me a few bucks a year, where's the justification in that? How do I make that justification? And I totally get it. That's why there's been such a demand for things like cryptocurrency or penny stock. Because if you only got $300.
Weighing 6% versus well, I could, you know, it could go to the moon. It's a lot sexier if it goes to the moon. Right. So when you're starting with very little money, it's hard to rationalize why I would buy a dividend paying stock that's only paying a 6% dividend. Well, here's where things get, get fun and interesting. When one of my criteria is that they've raised their dividend every year for at least 10 years. AT&T is one of those companies. So let's say that.
AT&T raises their dividend 10% per year. By 10%, I mean 10% of what they're already paying. So that means that year one, you're going to have a 6% return on investment. But year two, that means this is going to be at 6.6% on your original money, on the $300 that you put in now, this is better, but still 6.6%. You're like great, you know, $18.90 or whatever it is. Well, the next year this becomes 7.3%. Okay, so now a year after that, now it's becoming 8%. Now 8% on an investment is a good rate of return no matter what the economy is doing. So now we're starting to see a little bit of momentum here. A couple years in, and they keep raising 10%. That means now we're going to be at.
8.8 and then.
9 point what? 9.9 ish. 9.8. So now after five years or six years, our 6% is becoming 10%. If you run the numbers on this over more than 10 years, the numbers get really, really insane. But this is only half of it. Yes, it's really cool to see, you know, kind of a.
Parabolic or exponential curve on your rate of return. But there's another factor here and this is where the dividend reinvestment plan is so important. And in fact, if you don't use reinvestments, there's really not a whole lot of point in following this strategy. It would make more sense to just buy cash flow by investing in businesses or real estate investment trusts or something like that, because your day one return is going to be sexier. But when we factor in dividend reinvestments now, it's getting exciting. And here's why.
On this first day over here, we owned 300 shares, right? Or no, $300. We said 10 shares.
So we owned 10 shares of AT&T. Well, when we get this 6% dividend, this payout, that's going to be $18 or so. So that's going to end up being like half a share, right? And sometimes you can buy fractional shares. So let's say, I don't know if we can with AT&T, but let's say you can. That means year two, this is going to be ten and a half shares.
Okay, no big deal. Except that now this year our 6.6% is going to buy additional shares. So that payout, and I'm assuming the stock price doesn't change up, down, the numbers change. In fact, it's pretty compelling, even if the numbers stay flat or go down. But let's just say I'm assuming nothing else changes. This 6.6% now buys us about another half a share. We're now at 11. And now our 7% on our 11 shares is buying almost a whole other share. And now the 8% on almost 12 puts us at, I don't know. I'm now, I'm guessing, what is this, like 12.7? And then it's going to be something like 14. And now it's going to be 15.1. So if nothing else, we now have 15 shares of a stock paying out 10% on our original money. And so we have a compounding, a double compounding effect when the dividend gets reinvested to buy more stock. And so what we have is we've got, over time, a big curve upward that results in a lot of cash flow when we stop reinvesting. So at some point when you go to retire or you go through a hard time or you just want to.
Start a business, you're not going to have an income for a while. You can turn off the reinvestment and just take the cash flow from the dividends, which is going to be very sizable over a very long period of time. And when that's the case. You still own the underlying stock and it's paying you all this cash flow. So what does that mean? That means that you can sell the stock. It means you can borrow against the stock. It means you're going to have favorable taxable dividends because dividends are taxed at a favorable rate. It means if you sell the stock, you've got favorable capital gains earnings that you can, you can, you know, it's taxed at a favorable rate compared to normal income. So it puts you in a position to be able to live off cash flow and build up quite a healthy nest egg. And that is why over the long term, dividend paying stock is the one place where I'm putting in. You know, I'm chipping away every month. No matter what the economy is doing, I'm chipping away, buying more, building that portfolio. Because over the long term the numbers on that are really sexy and exciting.
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