Dividend Investing For Beginners

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Some people believe that the best way to build wealth is to invest in dividend paying stocks. Well, the question is, what is dividend investing? How's it done? Does it make sense and does it fit for you? In this episode of the Affluent Entrepreneurship, I'm gonna break it all down for you, give you the pros and cons, what it is and give you the primer on dividend investing. I'll see you in the episode.

Dividend Investing. Does it make sense? What is it actually in the first place and how do you do it if it, if it belongs in your portfolio? So let's just talk about the idea of dividend investing, what it is and what this all means. So here's what happens. Effectively a company is operating to make a profit. I mean that's, that's their goal is to make a profit and they have a decision to make. They can use the profits for a couple things. One is they can reinvest in the company to grow it faster, grow it further, and to put it into research and development, product development, team growth, all those things. Or they can take a portion of it, whatever that percentage is, and say, give it back to the shareholders, the people that own the stock, to say, hey, thank you for supporting us, thank you for.

Being a shareholder and we're going to give you a percentage back for that. Now what that means is that then they don't have it to reinvest in the company to grow, but they're giving a piece of it away. So it is a, it is a strategy that some investors and some people will use to, to look at and say, hey, if I buy a bunch of dividend paying stocks, I'm going to get dividends paid to me. I'm going to get cash flow from it. Which is one of the things you're trying to accomplish with building your money machine is to have enough cash flow that comes out of the machine to pay for your bills, to pay for your, your living, to your lifestyle. And on all those things. So, so dividends in general is just basically a distribution of the profits of the company for what it is. Now they can be paid monthly, they can be paid quarterly, they can be paid annually, they can be paid any time they declare and they can, they can literally make a special declaration of divide and that type of thing. So when we look at this, there's two statistics that I will typically look at. Now I, I don't do a deliberate amount of dividend investing. In other words, I'm not spending all my time looking for dividend paying stocks and, and intentionally building a dividend paying portfolio. However, I will tell you that, that because of the way I invest that I, we make multiple, multiple five figures in just dividends alone. Okay, so, so it can be substantial, but you need to have a good sized portfolio to do that. Now there's two statistics that we tend to track. One is something called the dividend payout ratio. Now I'm going to do some, I'm going to do some calculations here, but.

I just want you to do it for an example so you understand. So I'm going to jump to the iPad and everything. One is dividend payout ratio. The is what we call dividend yield. Both of them have an impact on really understanding what does it mean for a dividend. And so let's just look at dividend payout ratio first and what it is just like it sounds. Okay, what it is just like it sounds, it is the amount of income as a percentage that's paid out. Okay? So let's say you know it, you're, gonna, let's say that they, the earnings per share is a dollar, okay, one dollar. Okay? That's the earnings per share, meaning earnings per share, meaning that is the net income per share. How do they do that? They take the total net income divided by the shares outstanding. So they know how much income was generated per share that, that you own. So, so they look at the earnings per share. Then they, then you can look at the dividend that's paid. Say the dividend that's paid is 10 cents. Okay, well 10 cents. So how do you do it? 10 cents over $1 of earnings per share. So that's earnings per share. And this is the dividend equals a 10% payout ratio. Okay, now so they're paying out in this example, they're paying out 10% of their income to their shareholders, which isn't a huge amount, but it's enough that, that you're looking at it and saying, all right, so I'm getting, I'm getting a buck a share. I mean, I'm getting 10 cents a share for every share I have. If I have 100 shares, I'm going to get $10, you know, type of a thing. It's a, it's a 10% payout ratio. Now why does this matter? Because.

It gives you an indication of how sustainable it is. 10% of their earnings paid out in a dividend is actually not, not high, it's not necessarily low, but it, is it sustainable? And, and the likelihood is yes, it's sustainable because if you're, if I'm going to invest in dividend paying stocks, I want to know that the dividend's coming in regularly, which means that it needs to be sustainable. For instance, let's say that instead of paying out 10 cents, they were paying out 80 cents. Well, at 80 cents, if you look at it, if, if they're paying out 80 cents, 80 cents, that means that we have an 80% payout ratio. Well, what's the likelihood that a company can pay out 80% of their earnings and still keep themselves alive? Not very good. So the reason you look at the dividend payout ratio, and I look at it over a number of years, I look at it for a long time, 10 years, to look at the trends on it to see if they're holding the payout ratio, if it's increasing, it's decreasing. What, what is happening with it? Okay, so that's the payout ratio. It tells me how much of the income is being paid out. There's also, there's also the dividend yield and this is a little different calculation. It's basically the dividends paid divided by the stock price. Okay, so in this example, let's just assume that we still have the 10 cents that was paid out 10 cents, but the stock price. So now in the first example, we're looking at the earnings, the income. But let's say the stock price is $10. Okay? So that's the stock price. If I buy the stock on, on, on the stock market, $0.10 over $10 gives me 1% yield. So, so 1% yield. That tells me. Now why is this important? Because think about this. When we're trying to grow our wealth, when we're trying to build our money machine, part of what we're trying to do is get enough of a.

Return on investment that it allows us to build. Now if all I got was 1%, it's probably not something that I want to do because right now I can get 5% in a high yield savings account, take on no risk, very little risk at all. No risk at all. And, and be okay. Why would I take 1%? Because, remember I said in this case that they were only doing 10% payout. That means that 90% is being held back in the company. That means that there's this other piece of it. When I make investing decisions, I make investing decisions based on the total return on investment. Well, there's two components to a return on investment. One is the cash flow, the yield, which is the dividends, the cash flow. The other is the growth, the, what they call capital appreciation or the growth in the stock. So think about it this way. If we think about this example, let's say that I get 10 cents in dividends, okay? And so I get 10 cents in dividends. That is a 1% yield. The stock price is $10 right now, but then the stock price during the next year actually grows to $12. Well, 10 to 12 is 20%. So, so we can't ignore the fact that if I get a yield and I get growth, this becomes my, my total return. Okay? So you look at the whole thing, not just one piece of it, but a lot of times people are investing for dividend yield only. And when you do that, you're dealing with just that 1% dividend yield, which is fine. But you can see right now, to have a substantial cash flow, you're going to need to have a substantial size portfolio or something that pays out a really good dividend yield. So it is something that, that, that we use. We work, but we don't, we don't do it a lot. So let's just talk about the, some of the pros and cons. Why would you do this one? It is a source of regular income if they are paying out the dividends on a regular basis. If you look at the trend, you can look at the history for decades. There are some companies that have paid dividends for decades and you can see what their dividend yield is. Is the dividend yield going up consistently, is the payout ratio staying the same or going up or down consistently? So now I can, I can create some level of dependency on a regular income stream. There is also another element of this, and that is sometimes you don't need the dividend. Let's say that they pay you a dividend of $10, but you don't need the cash. So you can go into what's called a drip program, a reinvestment program. So instead of receiving the money, they buy more shares of stock for you. So they use the money to buy it. Now all of a sudden your holdings are growing and because you own more shares, you get more, you get more cash flow. And what happens is this compound effect of dividend investing starts to accelerate just like any kind of compounded growth. So that's, that's the other part of it. The other thing is that dividend paying stocks tend to be more mature companies that have had consistent profitability, they tend to be a little less volatile and more stable during market downturns. So it is something that people will put into the portfolio. But there are those that I know people that, that's all they invest in and doing it. So you have steady income stream, compounding thing, compounding effect. You have the signs of a, of a healthy company if they can consistently pay out dividends on a regular basis. And while they're growing at the same time, it's an indication that it's a, it's a healthier company. But you still have to analyze the fundamentals. You got to look at the company if we're going to really do that to make it happen. Now here's some of the other things, the cons behind it. One, anytime you get paid, you get paid a dividend, you're going to pay tax on it. If my stock price goes up from $10 to $12, even though there's a $2 gain, I don't pay tax on that gain unless I sell it. But if that company pays in dividend, I pay tax on that dividend. Sometimes that dividend can be taxed at capital gains rate if it's qualified or at regular income tax rates, which could be your highest rate, could be as much as 50%. So you're going to get hit with taxes on dividends. And here's another case. Remember I said you can reinvest dividends. If you reinvest that, you actually didn't receive the dividend. They used it to buy more stock. But you still have to pay tax on the dividend even though you didn't receive cash in doing so. So it, there's, there is a tax implication that you have to be aware of when you start to do dividend investing or dividends that come into play. The other con is that there's a lower growth potential if they're not investing. If they're putting money out as dividends, that means that they're not putting it back into the company for growth. So there may be a lower growth potential. The, the other thing is that, remember I said that companies that are paying dividends on a regular basis tend to be a little less volatile, but that doesn't mean they're immune for market risk and market fluctuations. And they certainly are subject to the impact of any kind of interest rates. So when interest rates are rising, bonds are actually more attractive than dividend stocks. And it won't be as.

As attractive when interest rates in a lower interest rate environment, dividend stocks are typically more appealing. So you are going to be subject to it. It is not, it is not without any issues. And so when I look at dividends, some of the things that we try to do, remember I said about the taxes, is that if we do some dividend investing and we do it in a qualified account, an Iraq, a 401k or things like that, all the dividends that are paid even though they're taxable, you won't get taxed on because it's in a tax advantaged account. And so you want to make sure that you're thinking about how it's going to be dealt with. So how do you build a portfolio? Does it even make sense? I think it makes sense for some people. Depends what your strategy is. Remember, lifestyle defines the plan, plan defines the strategy, the strategy will define the tactics. What we're talking about here is tactics. The question is, would these dividend paying stocks tactics fulfill the strategy that would make the plan a reality that will get you closer to your vision, your lifestyle vision. And so, so in some cases it makes sense to deliberately go into dividend stocks. But if you're going to do that, it's a little bit more nuanced in the sense of your analysis beyond what I want to go through here. But you're going to want to do regular portfolio reviews. You're going to want to dig into the company and the company fundamentals. I have kind of a nine point checklist where I look at company fundamentals. So you're going to look at dividend yield and dividend payout ratio, but you want to understand deeper the health of the company that's paying the dividends because if they're not healthy and those dividends go away, then it's a challenge for you. You're not going to get what you thought you got. So does it have a place in a portfolio? Yes. Should it be the whole portfolio? I don't think so. That's just my perspective. I'd rather have some growth over time as well as potential cash flow. And so I tend to invest for total return on investment rather than just dividend yield as, as a foundation and look at it from that perspective. Plus, I want to build a more diversified portfolio that mitigates and reduces the risk of, of doing so. So those are some of the key points. That's kind of the, the basics of dividend investing. It's something interesting for you to look at. It is something for you to consider as part of your portfolio strategy and, and to really kind of dig in and say where does it fit, how does it fit and how much of it fits into the portfolio to make that happen. Like I said, we have dividend paying stocks in our portfolio. We make multiple five figures in dividends on a regular basis. So it is part of that. And that stock portfolio is continuing to grow. Plus we have the other parts of the portfolio too. So I hope this helps. I hope you found this of value and I hope that it gives you a little inkling of some other things you might be able to do with your portfolio as you move forward with on your journey to financial freedom. All right? And if there's anything I can do to help you on this road, please reach out, let me know. Here's the deal. I'm on a con. I'm, I'm on a crusade to make sure that we light the path for a million families to financial freedom. And I want you on that journey. All right. Until I get a chance to see you in another episode on the road or as I'm speaking, always, always strive live a life that outlives you. Thank you for listening to the affluent entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

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