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