Above all else I’m about getting cash flow heavy. After all cash flow is where personal wealth starts. If you can achieve cash flow, then you can use money as a tool instead of a treating it emotionally like most of us do.
There are vast numbers of ways to generate cash flow, and one option that keeps on popping up is taking advantage of ‘dividends.’
So let’s take a look at them and find out what all the fuss is about
- What are they?
- Are they Worth it?
- How much do you need?
- Better ways to earn
What are they?
For companies that are listed on the stock markets, not only can shares in those companies be bought and sold, but dividends can also be paid out to shareholders.
These dividends are typically paid out quarterly to the shareholders, and the dividend amount is typically ‘known’ either from previous historical amounts or may be published in advance.
It’s important to know that the amount paid from dividends are not proportional to the stock price, and are also not proportional to the earning that a company publishes quarterly. In fact a company has no obligation to pay dividends to shareholders at all, so some listed companies may not even offer them.
But the question always will become – Are they worth it?
An example of a dividend paying stock can be as follows.
A listed company offers $1.64 per share for dividends on an annual basis. This is $0.41 per quarter.
If the share price is $40.00 per share, then the dividend yield is 4.1% annually. Better than a bank!
But what if you want an income from dividends?
Let say you have a money goal of $150,000 per year.
At 4.1% you would need a massive $3.658 Million invested just to get the money you need through dividends!
Are they worth it?
As the saying goes … you can’t buy lunch with dividends. In fact, your yield goes up if the stock price falls, but this has other problems such as your total equity value possibly going down.
But there is more.
Dividends, being low yield (yes I said low yield) are one of the safer, and that means longer term strategies that you can employ.
Each time you have dividends paid out to you as a shareholder, you collect income back from the initial stock purchase. This means that your minimum break-even price for a sale of your stocks becomes lower over time. If this is coupled to a rising stock value, then as time becomes more relevant your capital gains increase.
The real longer term win is when the value of dividends increase over time, and this adds to quarterly cash flow, but it has to be said that buying any stock to gain access to dividends is a long term, low risk and above all a low maintenance strategy, and that means that a lot of money making potential is being left of the table.
Are they worth it?
… no and sort of, in that order.
Like any cash flow, income or investment strategy (which I can’t ‘advise’ on) it’s down to you. What level of effort are you willing to put in and what sorts of risks are you willing to take?
Purely from a cash flow perspective, my opinion is that dividends aren’t worth it. You can’t buy lunch with them. And to that end, dividends are almost a set and forget strategy.
When it comes to set and forget you’d be better off, going into residential property, and watching your equity rise by the better part of 10% per year.
Even if you receive dividends for a decade from a single stock, it would only take a major market correction to gut any and all equity gains from the owned stock.
How much do you need?
Everything depends on your money target. Some dividends pay more than others. You don’t have to go too far to find stocks that earn 6% while 2-3% would be normal.
The answer to how much you need to invest is straight forward.
Take the money target and divide by the yield.
To earn the single retirement pension is $24,268.40 per year, with a 3% yield would require $808,947 invested while;
$150,000 per year would need $5 Million at 3%.
If you have the means to invest this much there are better way it can be used, and I’m not even supposed to tell you that.
Better ways to earn
Whether it be, $808,947 or $5 Million, as mentioned in this article and others, there are far better money makers out there. Property can yield 10% per year through to 20% per property … depending on strategy.
Stocks can offer, capital gains, 1-3% per trade in as little as a month, and business can offer unlimited cash flow potential.
All in all, dividends are a low risk, low maintenance strategy and that means the earnings are low too.
In fact, on my personal list, dividends come in at number 6, after business, stocks, property, self-employed salary, employment in a job, dividends, banks and cash.
Are they worth it?
You now have the information to make your own decision.