So I’ve said it before and I’ll say it again but you should not be picking stocks. If you need some logical reasoning to stop yourself go read A Random Walk Down Wall Street, it’s got 450 pages of reasons to not pick stocks. BUT with that being said, I’ve got a confession to make. I’ve picked stocks before, and I’ll do it again. In fact, I currently have a small portfolio of about 10 different company’s stock worth about $920 at the moment. The thing is, I opened this account a few months ago and put in $1000. Even with all the gains in the market recently, I’ve lost money. I know in the end there’s almost no chance I beat the market or anything like that but I’m doing it for a few reasons.
1 – It’s fun. Kind of like gambling.
2 – It’s a small amount of my money.
3 – I want to use it as an experiment and report back on results in the future.
4 – I want to try out a dividend investing approach.
The index funds offered by companies like Vanguard are almost never going to take big risks on high dividend paying stocks with shaky financial sheets. But I will. Because of this the highest dividend yield you’ll find from a Vanguard fund is going to be around 3.5%. If you do your research and buy at the right time, picking out your own stocks can get you yields between 6-10%. If you’re a fan of passive income, you know how amazing that sounds.
Let’s say you buy stock from company A at $10.00 per share with a yield of 10%. This means every year you can expect to receive $1 from company A just for holding their stock. If you were to buy $100,000 of this stock you’d own 10,000 shares, meaning you’d get paid $10,000/year by the company. If the company does well and increases its share price to $15.00 per share you’re looking at a $50,000 increase in net worth to $150,000 plus the $10,000 from dividends, or $160,000 total. Not a bad year. But, let’s say instead the stock dropped to $9.00 per share at the end of the year then moves back up to $10.00 by the end of year 2 of owning the stock. After year 1 you’d have $90,000 worth of the stock plus $10,000 from dividends, effectively coming out even. At end of year 2, you are back to having $100,000 worth of stock but also have another year worth of dividends for a 2 year net worth of $120,000. Not too shabby. If you can live on $10,000 a year or cover most expenses with just the dividends, you can avoid selling shares when they are low, or at all, effectively letting them grow in perpetuity.
The thing to recognize here however is that just like the stock price, the dividend amount companies distribute can vary all the time which SUCKS. There are a handful of companies known as the dividend aristocrats that have distributed the same or increasing amount of dividends for at least 25 years. They are giants like Coca Cola who have a lot of money on their hands. Other companies with high dividends to look out for are real estate investment trusts (REITs) which can have high yields and a relatively stable stock price. So, picking stocks and dividend investing can be fun and worthwhile but understand what you’re getting yourself into and always kept it to a small percentage of your net worth.