Whether you realize it or not, it is entirely possible to retire early, however, the issue is that many people lack the awareness of how to do so. In fact, there are still many people today who rely only on a pension for retirement income but let’s face it — pensions aren’t what they used to be. Fortunately, dividend investing can save the day about you’re about to learn how!
Firstly, what is a dividend? A dividend is a profit that a company pays its shareholders. When a company that pays dividends generates profit, part of the profit known as retained earnings is reinvested into the business while the remaining is distributed among the shareholders based on the volume of shares that they own. In effect, dividends are a way for investors to get returns from a company without selling their shares. Also, dividends are one of the ways that a company incentivizes external parties to invest in their company.
Now that you know what a dividend is, what is dividend investing? Dividend investing is simply the strategy of buying stocks that pay dividends to receive regular income from your investment. This means that you don’t only receive returns when the value of your stock increases but also earn income when the company makes a profit and distributes a dividend.
So, when a company makes a profit, the board of directors meets to deliberate and decide how best to make use of the profit. They decide the portion of the profit that should be invested back into the business as well as the portion that should be distributed to shareholders as dividends. Once they reach an agreement, the company would then announce the dividend as well as the date of payment. For instance, a company may decide to pay 50% of its profit as a dividend and the total profit per share is $10. This means that the company would pay $5 as a dividend per share. In this example, if you have 100 shares of that company, you would receive a total of $500 in the form of a dividend payment.
It is important to know that most companies pay their dividend quarterly or four times in a year. That means that in the previous example, you would receive $125 four times a year which equals your $500 payout. However, some companies pay their dividend monthly or semiannually as determined by the board of directors. In addition, you must know some important dates as a dividend investor. The first date is the declaration date, which is the date that the dividend is declared. Other dates that you don’t want to forget are the ex-dividend date and the record date. As a dividend investor, it is possible to buy shares after the declaration day and still receive the dividend, however, these two days are what determine whether you will get a dividend if you buy a stock after the declaration date or not. As an investor, you would only be paid a dividend if you own the stock before the ex-dividend day. And only investors that have shares on the record date qualify for a dividend. Finally, the last date, which would put money in your account and a smile on your face is the payment date.
Furthermore, dividends are usually paid as a cash deposit into the investor’s account. However, it is essential to know that some companies pay dividend as shares and it is known as stock dividend. What this means is that instead of paying cash, the company would pay you with extra shares. For instance, if a company decides to pay a stock dividend of 10%, shareholders with 100 shares would receive additional 10 shares of the company.
Now, I am going to be sharing with you some examples of stocks that pay dividends as well as how much they yield annually. The first example is Procter & Gamble. It will interest you to know that this consumer products manufacturer has increased its dividend payout consecutively for 63 years. In the last quarter of 2020, the board of directors of Procter and Gamble declared a quarterly dividend of $0.7907 per share and the total dividend payout for 2020 was $3.118.
Another example of a dividend-paying stock is AT&T. This telecom giant has also increased its dividend consecutively for almost four decades. The board of directors of AT&T declared a quarterly dividend of $0.52 per share in the year 2020 bringing the total dividend payout for the year to $2.08. Also, Realty Income, which is a real estate investment trust, is another dividend-paying stock that has consistently increased its dividend for 25 years. Unlike other dividend-paying stocks that pay quarterly, Realty Income pays its shareholders monthly. And in January 2020, the dividend per shares was $0.2275 and this amount increased to $0.2340 in December 2020, therefore, bringing the total dividend payout for 2020 to be equivalent to $2.794 per share.
Let’s move on to talking more about how to retire with dividend investing. The first step is to assess your cost of living to know how much you need every year and cut out unnecessary expenses. If you don’t mind me asking, do you know how much you spend in a year or even in a month? About 3 in 5 adults don’t know how much they spend in a month and that is one of the reasons why most people spend more money than they should. Your cost of living is how much you need to pay for your basic expenses and maintain a certain lifestyle. These include how much you pay for clothing, food, housing, education, transportation, healthcare, and so on.
Therefore, to calculate your annual cost of living, you should start by assessing how much you need in a month and multiply it by 12. You can calculate your monthly expenses by keeping a record of your daily spending. Every month, you’re going to have some fixed spending such as a mortgage payment and insurance as well as some variable spending such as purchasing clothing and electronics. One of the advantages of doing this is that you will know how and where you are spending your money. You should be able to see where you need to adjust your spending immediately after calculating your living expenses. With this, you will be aware of how much you need in a year to cover your living expenses.
Next, you have to research for reliable dividend stocks to invest in. The research stage is crucial because not all dividend-paying stocks are reliable. Some companies may offer you a high dividend but because their business is not sustainable, they may stop paying a dividend after a few years. Therefore, it is important to look out for companies with consistent growth for long-term profitability. For instance, Procter & Gamble as I mentioned earlier, has increased its dividend payout consecutively for 63 years. You can easily search for most companies online to see their dividend payout history.
Furthermore, before investing in any dividend-paying stock, you should consider the dividend yield. This is the percentage of how much a company pays as a dividend relative to its current stock price. In other words, you can predict the percentage return of investing in a company by using its dividend yield. It’s calculated by dividing the annual dividend payout by the current price of the shares and the multiplying it by 100. For example, if the price of a company’s share is $100 and the annual dividend per share is $4 then the dividend yield of the stock is 4%. The reason why dividend yield is important is because you can use this information to determine how much to expect as a return from your investment. For instance, you will get $50 every year if you invested $1,000 in a dividend stock with a 5% dividend yield.
I’m sure as you’re reading this right now, you might be looking for stocks with high dividend yields, however, higher yields do not always mean better performance. For instance, let us go back to the previous example I gave of a company whose share price is $100 with $4 dividend per share. Assuming the price of the share falls to $60 and the dividend remains at $4, this means that the dividend yield, in this case, is 6.67%. Although this is higher than the previous 4%, however, a drop in share price could be an indication that there is something wrong with the company and it is no longer sustainable. Therefore, don’t just rely on high dividend yield while investing. As I said earlier, it is important to look out for companies with consistent growth for long-term profitability.
Another important consideration before investing in dividend stocks is the dividend payout ratio. The dividend payout ratio is the percentage of a company’s profit that was paid as a dividend. For instance, if the profit per share of a company is $10, the board of directors may meet and decide to pay a $3 per per share dividend. What this means is that the dividend payout ratio of the company is 30%. The reason why this is important is that investors can use this information to tell if the dividend payout of a company is sustainable. Typically, the percentage of a company’s profit that is not paid as dividend is reinvested back into the business or used to pay debts. A mature company may be able to afford a high dividend payout, however, most new companies may need to reinvest the money back into the company to sustain its growth. Therefore, by considering how much of a company’s profit is paid as a dividend, you may be able to tell if it is sustainable for the long term or not.
Finally, before investing in a dividend stock, you should consider stocks with a growing dividend. This is straightforward and simple to estimate. Look at the company’s website and see how much they’ve paid as dividend in the past to see if the rate is increasing or decreasing. Investing in a company with a growing dividend is more profitable in the long run than a company whose dividend is going down.
Above all, one of the main reasons why people invest is be able to quit their jobs and attain financial independence. Therefore, you must know how much you would need to invest to cover your annual living expenses based on the dividend your portfolio would provide. Remember that earlier, I showed how to calculate your annual living expenses. Your average annual living expenses can be as low as $10,000 or as high as $500,000 or more depending on your location and lifestyle.
Let’s now use an example to illustrate how much dividend stock you would need to own to cover a moderate cost of living. I will assume your annual living expenses are $20,000. Using this example, you will need to invest at least $400,000 at a 5% dividend yield to cover your $20,000 living expenses. Of course, if your living expenses are more than $20,000, to cover your costs you would either need to have more money invested or receive a higher dividend yield (or both!).
Now, one way to ramp up your dividend holdings is to use a DRIP otherwise known as a dividend reinvestment plan. This is simply a program that allows you to reinvest your cash dividends to purchase additional units of shares. Many brokerages or investment companies allow investors to automatically reinvest their dividend commission-free or for a low fee. One of the biggest advantages of this plan is the compounding of return. That is, as you reinvest over time, you are going to receive more dividend payments. For example, if you invest $1,000 and the dividend yield is 5%, you would receive a dividend of $50. However, by reinvesting this amount, you would receive $52.5 instead of $50 in the second year and $55.13 the following year.
Therefore, getting retiring through dividend investing is entirely possible if you have the capital and patience to build up a sizeable portfolio that you can rely upon now and into your golden years!