I wanted to write about this for awhile but I can find a good starting point so today I just sat down and decided to type out what my thoughts are about this topic.
What are dividends?
In this post, I’m referring to the stock market’s term “dividends” which means an amount paid out to investors who hold shares of a company. Mostly larger companies do this when they’re big enough that their investors have been holding their stock for a long time and this might be a way to keep investors interested in holding it even longer plus it’s a way for investors to gain some money without selling shares.
What am I doing with dividends?
The past few years, I’ve been using 2 main ways of investing my money (outside of a 401k). First, I use Betterment, this holds most of my money since I don’t want to be playing with most of my long term savings. Second, I use Robinhood which holds what I call “experimental” money. I call it experimental instead of play or fun money because even though it’s all dependent on me how I invest this money, it’s still real money! I still want to make sane decisions and hold stock of companies that are valuable.
Robinhood makes it extremely easy to buy and sell stock and best of all, it’s always free! This means buying 1 share or 100 shares doesn’t cost a penny, traditional brokerages charge an insane amount no matter the number of shares being traded.
Dividend as income
Having no minimums or fees on trading, Robinhood makes it very easy to start buying shares of many companies and essentially allowing you to build an extremely well diversified portfolio.
I started using Robinhood at the end of 2014, so about 3.5 years now. In the beginning, I was just buying a few shares of each company I just was interested in or had some familiarity with and this quickly turned out to be a mediocre strategy. If you ask most people “what is your goal with investing?” I’m sure most will say “make money.” And that’s really why it’s easy to say “well, that should be the strategy, to make money” but I think it’s more complicated than that.
Seeing your shares rise in value is easy in a booming economy like the past few years but I believe this will start to slow down or some sort of a bubble bursting will happen soon.
So to think about how to make an income using dividends, I started looking at companies that either pay dividends consistently or pay a high amount of their earnings as dividends. The latter are usually companies that are REITs (short for Real Estate Investment Trust, learn more). REITs pay high dividends and are usually pretty cheap to buy, but the problem is, the share price doesn’t see tech company gains and it’s dependent on the economy since infrastructure and real estate are pretty dependent on how the economy is doing.
Examples of companies that pay well in dividends and are just household names are AT&T, Colgate-Palmolive, Coca-cola, and many more. These are called Dividend Aristocrats, they’re well-known and large companies that usually align very well with the economy.
Right now, I’m able to get about $40 in dividends every month (not an average). The goal is to slowly move this number higher and higher and I’m not sure what the best way to go about this right now as I’m buying a mix of high growth companies as well as REITs which pay a high dividend.
I’ll post more about this in the coming weeks, please let me know if you’d like to know more about any of this.