Dividend investing: what does it take?

Woohoo..last week I got 31€ in dividend payment. This came as a total surprise to me. I do have 1 individual stock from the previous company I worked for, but I forgot about it. I want to use this event to analyze to see if dividend investing is something for me. Not only from a time-I-need-to-research perspective. I am curious to see if it will help me reach my goals. Clearly, I you read the stories of some dividend investors, then this is a no brainer: go for it. But the same goes for other investment styles.

This is only 1 case, it is not representative for DGI as a whole. But it got me thinking…

Lets look at the numbers: the net yield of the divided that hit my account is 1,91 pct (compared to the 2,73 gross). In the current low interest rates, this is not too bad. If you shop around you can get 2,0 pct on a restricted account with 1 bank in Belgium. The second best offer is at 1,75 and then 1,6. (date of research: May 30). So overall, it is in the top returns compared to the savings rate. I know, I shortcut here: there is the dividend growth over time and the capital appreciation.

There is one important point: the risk you take. Savings in Belgium are 100pct capital guaranteed by the state. You have zero risk. with stocks, this is not the case. The principal value can make great and huge swings. worst case, it reaches zero.

So, what do I consider the pros and cons from this approach

PRO

  1. Motivation of passive cash flow: It is very nice and motivating to see cash coming into your account without doing anything at all
  2. As soon as the dividends you receive each year are bigger than your expenses, you are financially independent. It then takes no further effort.
  3. You do not touch your principal investment
  4. It is said that dividend growth stocks have less volatility than the overall stock market
  5. Individual stock offer more opportunities to explore option strategies, compared to the index funds that I own

CONS

  1. There is a substantial tax to be paid. In Belgium there is in general 25pct tax on dividends and on top of that the foreign withholding tax. This eats away 40pct of the dividend for US, FR, GE and some other good dividend paying companies. As a result, you need a bigger portfolio to reach your goal compared to an index capitalizing portfolio.
  2. It takes time to research the dividend companies you want to buy and to follow up the companies that you have in your portfolio. Not only on individual stock level, but also on overall portfolio level. There is the general industry and geography asset allocation, but also the dividend per industry asset allocation.
  3. You require at least a portfolio of 40 stocks (according to me) ti have sufficient diversification.

Where does this leaves me?

I like the motivational effects from cash coming into your account each month. This is truly passive income. It can be used to cover expenses.

But, for now, I lack the time to research companies to invest in. And yes, there are some great blogs out there, but it is important to do your own research.

In the short term, I will stick to building up my index portfolio. Once it has reached the size comparable to my insurance products, I will look into DGI stocks. By then, the kids should be bigger and I hope to have more time to investigate stocks and the related option strategies.

What are for you the drivers to pick an investment strategy above another?

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8 thoughts on “Dividend investing: what does it take?

  1. We choose our strategy for likelihood of success while minimizing risk. All the statistics show that, long term, most people aren’t very good at picking stocks or timing the markets — so we don’t try! We invest mostly in index funds with a few mutual funds.

    Nice you are seeing some passive income!

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  2. Since your also from Belgium (no capital gains tax), you should stick with capitalization index ETFs.

    If you need money from your investments then just sell a part, which is way cheaper then paying 25%-37% tax over and over again.

    Good luck!

    Liked by 1 person

  3. I think you could look into a hybrid of index funds and dividend stocks for your investment portfolio. I’m always surprised to hear that Belgium has such high tax rates for investment.

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  4. Ciao ATL,
    I have decided to start commenting from here… I agree with you, 40 stocks to have diversification and currency issues make things complicated, but just apparently. In the end it’s all just math… 🙂
    Taxes are the same here in Italy (26%), but the best I know of is around 15% in the States (if you are resident), but consider that there are countries such as UK that do not have Dividend Taxes for example. Costs are very important to track, but as in the future you buy on the same stocks you can wait to do bigger transactions and generally the investment costs are going to be covered by the dividends. Consider also that money is instantly available. In the unfortunate case that you need cash quickly, stocks are sold immediately funds aren’t.
    Lastly, yes dividends are taxed today, but your index returns will be taxed tomorrow at a rate that it’s only likely to grow, making it less efficient in the long run.
    Also in Italy (but not sure about Belgium) losses from stocks compensate with gains, while index funds don’t get this chance.

    Let’s say that I am not a huge fan of funds, they lack control IMHO… But alas you need to follow the PF a little, and that takes time.

    Ciao ciao

    Stalflare

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    1. HeyStalflare,
      Thx for stopping at my blog.
      it is indeed unsure how the taxes will evolve later on. This might indeed impact the accumulating funds that I have. I will react to that when the news is announced.
      With regrads to the funds, some are trackers that trade on the exchange, so the speed to sell and get the money is the same as with stocks.
      Greetz

      ATL

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      1. Ciao ATL,
        I see so you also have ETFs not just funds in the PF. In that case yes they behave pretty much like stocks do. I see that you decided not to disclose the names of the stocks/funds that you buy, why is that?

        Ciao ciao

        Stalflare

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        1. Not disclosing what I buy is more an implicit choice than an explicit one. I guess it is a time constraint. I should indeed add to my todo list a view of the assets in my portfolio. A lot of info is available in different articles, but not centralized indeed. The ETFs are IWDA, CESL and EMIM coming soon.

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  5. Taxes are indeed one of the big nuisances for Belgian dividend investors, it’s no fun to see a quarter (Belgian stocks) or over a third (most foreign stocks) of your dividends flow to the tax man. On top of this, you need to be careful whenever a company announces a spin-off as the Belgian tax man wants 25% of that as well!

    Other than that dividend investing is a lot of fun, it’s very motivating to see dividends come into your account several times a month and personally I like the aspect of tracking and keeping up to date with individual companies.

    Like

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