Is dividend investing for young investors?

Dividend stocks are not the ‘next darling of the wallstreet’. Price of these stock won’t go up 100% in a day and drop 90% the day after.

Most young investors find dividend investing boring.

Are dividends stocks good for young investors?

Investing in dividend paying stocks that are stable and grow with time is a better option then to invest in stocks that have a lot of volatility. When you are young with little money to invest, you want to grow your capital while protecting your wealth.

You may not sounds cool investing into boring dividend stocks such as ‘MacDonald’s’.

While it might be great if you have invested in the next Tesla, Amazon or Google.

But it will be pretty bad, if you have invested in similarly famous companies such as Yahoo, AOL, Pebble, Path and StumbleUpon.

As a “Young Investor” myself.

I will rather have more money, than looking cool and be broke.

Because…

Investing is not to impress others.

Investing is to prepare for your financial future.

Why good dividend stocks often grow as well?

If the dividend stock is a good dividend stock, it will probably grow with time. Growth of the stock is due to the management’s ability to increase the income, and strong MOAT due to the nature of the business.

(We have an in-depth article on teaching you how to find a good dividend stock, you can check it out after this article.)

We called Good Dividend Stocks, as ‘Dividend Growth Stock’.

Good dividend stocks have the characteristics of both a dividend stock and a growth stock.

  • These stocks give dividend periodically
  • They increase in value and grow over time.

Being young is an huge advantage in investing.

When you are in your 20’s, you have an huge advantage over those in their 30’s, and those in their 30’s having huge advantage over those in their 40’s, and so on.

Smart young investors like you should consider investing in good dividend stocks.

Here is why…

Why smart young investor should invest in dividend stocks

1. Compounding

“Compounding is the eight wonder of the world. He who understand it, earn it, he who doesn’t, pays it.”

Albert Einstein, Year 1987-1955

When you are young, time is your friend, and compounding is what makes you rich.

Many dividend investors are made rich because of 2 reasons,

  1. Knowing how to find a good dividend stock
  2. Understand the magic of compounding interest and let time work it’s magic.

Warren Buffett says,

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”

Well, you probably don’t need to be living in America to be wealthy. Nowadays, the internet connects everything, but you will definitely need the power compounding to be wealthy.

When you are young, you have much more time to compound the money you invest then those who are older than you.

Hum… still not convince?

Here is an example to help you understand the power of compounding.

Power of Compounding (Example)

There are 3 friends Bob, Mary and John who read this article and decided to invest in some good dividend stocks.

Goal: Retire at age of 60

(Check out our article on, ”how much you will need to retire as well!)

They invest in the same stock giving them same returns and dividend yield each year.

The dividend stock they invested have the following metrics:

  • Grow at 5% per year
  • Have an 5% yield on dividend

Each invest $100,000 into the dividend stock.

The only difference is each start investing at different age, but retire at the age of 60.

  • Bob invested $100,000 in the stock at the age of 20.
  • Mary invested $100,000 in the stock at the age of 30.
  • John invested $100,000 in the stock at the age of 40.

At the age of 60 each have the following amount for their retirement

  • Bob invested at age of 20
    • Invested $100,000 for 40 years growing at 5% per year
    • Stock Value
      • Initial = $100,000
      • 40 Years later = $704,000
    • 5% Dividend Yield Per Annual
      • Initial = $5,000
      • 40 Years later = $35,200
  • Mary invested at age of 30
    • Invested $100,000 for 30 years growing at 5% per year
    • Stock Value
      • Initial = $100,000
      • 30 Years later = $432,194
    • 5% Dividend Yield Per Annual
      • Initial = $5,000
      • 30 Years later = $21,610
  • John invested at age of 40
    • Invested $100,000 for 20 years growing at 5% per year
    • Stock Value
      • Initial = $100,000
      • 20 Years later = $265,330
    • 5% Dividend Yield Per Annual
      • Initial = $5,000
      • 20 Years later = $13,266

John will only have 265k for his retirement if he have invested at age of 40, which is not too bad. But the dividend ($13,266 per annual) he receive from his investment will probably be not enough for his retirement.

Mary who have invested 10 years earlier than John and have almost double of John’s investment with 432k for retirement. As an icing on the cake, she will have a pretty modest amount of dividend for her retirement ($21,610 per annual).

Bob will probably have the best life of all. Investing young at the age of 20, Bob will have over 704k to spend for his retirement. His investment generates him quite a sum of dividend for him to live off each year ($35,200 per annual) .

If Bob keep letting his investment grow and spend only the dividend, he will probably not to worry about money for the rest of his life.

Investing $100,000 in the same stock with just 10 years difference will have a huge difference in your retirement life.

Such is the power of compounding.

2. Lower Risk

Risk is very real, and losing money really hurts your investment return.

Even if you are young, not losing money matters.

A good dividend stock generally have much lower risk when in compared with a regular growth stock.

Loss 50% today and gaining 50% tomorrow does not mean you have not loss anything.

  • $1.00 that loss 50% = $0.50
  • $0.50 that gain 50% = $0.75
  • $1.00 – $0.75 = You loss $0.25

For you to break even, you will need to gain 100% which is much harder to do then avoid losing money.

There are many investing gurus that ask young investors to take on more risk so that they may earn more.

So called gurus often preach, “more risk gives more return”.

I disagree.

More risk is NOT more return.

You don’t need to take on more risk to get more return.

Investing is only risky is because you don’t really understand the stock you are trying to buy.

Investing without understanding is not investing.

It is gambling.

Smart dividend investor like you don’t gamble, you invest in what you know.

Most good dividend stocks are established companies.

Established companies are less risky when compared with a small company which is less likely to have good financials.

Established companies have these few characteristics:

  • Long history of business which shows some sort of moat.
  • Good amount of data for research before you buy.
  • Comparatively easy to understand business.

Buying stocks offered by establish companies (good dividend stocks) helps you to lower the risk during your investment journey.

“The individual investor should act consistently as an investor and not as a speculator.”

Father of Value Investing, Ben Graham, Year 1894 – 1976

You are an investor and not someone who can predict the future.

Make investment decisions based on facts and analysis rather than risky speculations.

3. Dividend Income

Dividend income is important for young investors, especially for those who have less experience in buying stocks.

The reason is simple.

Having dividend income helps you to become less emotional when investing.

Emotion kills investment returns.

Warren Buffett says,

“If you cannot control your emotions, you cannot control your money.”

Everyone knows that if we want to earn money in stocks, we buy low sell high.

But in reality, most young investors and even some pros, buy high and sell low.

Why?

Investors that are unable to control their emotions make 2 very bad mistakes,

  • They are fearful when the stock drop, thus sell low.
  • They are greedy when the stock raises, thus buy high.

How does having dividend income help in controlling your emotions?

Dividend income control your emotions in 2 ways:

  1. First, dividend income reduces your fear of losing money, thus you will be less prone to sell low.
    • Even when the stock price drop, your dividend helps you to reduce the impact of the loss.
  2. Secondly, dividend income allows you to have a better cash flow.
    • Better cash flow prevents you from being forced into a situation where you need to sell your stock at a bad timing.

As a Bonus, dividend income can boost your return!

Dividend income can increase your investment return in 2 ways:

  1. Reinvest automatically by joining Dividend Reinvesting Plan (DRIP). It automatically reinvest your dividend income into the same stock passively.
  2. Reinvest manually with the extra cash you get from the dividend in the same stock, or other stocks when the price is low. (You’ll need to know how to value a company to get the best return.)

Biggest myths about investing

Many investing gurus advice younger investors to invest in growth stock over dividend stocks.

Myth: Although growth stocks are usually very risky. When you are young, you can afford to take more risk and thus, this is justified.

This is bad advice and this is why.

Although, when you are young you can afford to take on more risk, as you have more years for you to recover from that downfall.

But that idea of getting more risk and losing money, broke the rule of investing taught by Warren Buffett, the most successful investor in the world.

Warren Buffett 2 Rules for Investing:

  • Rule No. 1: Never lose money.
  • Rule No. 2: Never forget rule No. 1.

If you put yourself more risk than necessary, you will probably break Rule 1 and 2 of Warren Buffett.

Instead, here is a suggestion.

Invest in good dividend stocks that grow.

This form of investing is basically best of both worlds.

Good dividend stocks are something that is both safe and have high rate of return.

Should young investor like you buy dividend stocks now?

Investing in good dividend stocks can be one of the best strategy for young investors. You will be able to earn passive income in the form of dividend and grow that dividend over time as the the company grow.

The key, is to know how to find a good dividend stocks.

Which in my other article, I have listed down the top characteristics of a good dividend stocks. Warren Buffett have made over $3.8 Billion dollar in dividend a year by owning these great dividend stocks.

Smart young investors should consider investing in dividend stocks because of 3 main reasons:

  1. Compounding your returns to prepare for retirement
  2. Lower risk which gives you better chance of getting better return
  3. Dividend income which helps to remove your emotion from investing

Start Young

Warren Buffett started to invest young at the age of 11. That is the first ingredient that made him a Billionaire.

You are probably older than 11 years old right now, but it is never too late.

Probably you will not be the richest investor, but getting to live comfortably through investing is totally possible.

The second ingredient for building wealth through investing is even more important.

Gain Knowledge

Knowledge is what differentiate a successful investor from the dreamers.

Successful investors like Warren Buffet is successful, because he have the right knowledge to make the right decision to buy or sell a stock.

Combined with the right investing knowledge and advantages of starting young. You have the time as your friend and power of compounding as your secret weapon.

Successful investors like Warren Buffett read approx. 500 pages a day.

Knowledge on investment can be learn from books or articles like this one. Reading can only make you wiser and smarter, so that you too maybe able to make the right decision in your investment.

Will Durant Said:

“Education is a progressive discovery of our own ignorance.”

Hey Buddies!

Have our dividend investing post inspired you?

Personally, I’ve only started my investing education for a decade or so, and I am still learning lots on the way.

Dividend investing is by far my favorite and I strongly encourage you to start your investing journey while you are young!

Anyways, if you like this post, check out my other post on dividend investing below.

Till next time!

Kopi Buddy Signing Out!

PS. We are working on creating a forum for our growing community, join our other buddies in a conversation there!

 

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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.

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