Saturday, September 8, 2012

Why Dividends?

I'm a pretty open person, and I tend to get pretty excited about things. I get especially excited when something I'm doing is going to radically change my life. Ever since I've discovered budgeting and investing I feel like I've really revolutionized my outlook on life. I'm not saying that saving most of your money and investing that savings in dividend growth stocks is the best way to go in life, but I feel it's best for ME, and because of that I'm very excited about the future.


Sometimes, being a proud and outspoken person gets me talking to people that are sometimes interested in the things I have to say, and sometimes they are uninterested. I've had conversations lately with people I work with about my outlook on life, investing and savings. Most people I talk to generally agree that saving and living frugally is probably a good way to approach your finances and life in general. They would also agree that investing said savings into something that is going to generate wealth and income is also a good idea. But I get a question a lot of the time: Why Dividends?

People ask why not save money and open a business? "Hey, why not open a hot dog stand?". Well, although I enjoy eating hot dogs, I don't know if I'd like standing in one spot for seven hours at a time serving them up. Although opening a hot dog stand is a very simplified version of the question, it is valid. Why not open a business instead of investing in dividend growth stocks? Let's examine that question.

Success Rate 

Although the figures are contested, it's generally accepted that 2/3 of first-time businesses either break even or never turn a profit. That leaves a ~33% chance that you will eventually make money on your business start-up. There are pretty serious start-up costs associated with starting a business. And, let's not forget the fact that usually starting up your own business means you are your own most valuable employee. It usually requires a lot of know-how, hard work and determination. With dividend growth stocks there is still a chance of losing money. Obviously investing in an overvalued business, or a business that makes products that people don't really need or want would be just a couple different ways you could lose money. A company could cut dividends for one reason or another. I think the odds are good that I'll make money on my investments, however. Companies that I invest in are publicly traded, which means I can look at their balance sheets and see if they are making money. If the business is good, they are making a product that people want or need, and they have a history of rewarding shareholders then I feel the odds are good that I will make money on that investment.

Start-Up Costs

With dividend growth stocks, it's passive income. That term is very important. By passive, that means generally little or no work is needed to receive the income. I don't have any start-up costs. You can open a brokerage account with most online brokerages with as little as $500. Even a hot dog stand requires pretty hefty start up costs, as this stand costs $7,099. I also believe that major blue chip companies are better at making money than I am. Although having confidence in one self is an excellent tribute to have, I would absolutely admit that Coca-Cola has a better ability to make money than I do. I would bet that McDonald's has a better chance of having a high return on investment than I do. I'll stick to buying my hot dogs at the local grocery store.

Pricing Power 

Dividend growth stocks also usually outpace inflation because companies that are able to grow their earnings and grow their dividends usually have a great brand, a wonderful product and some type of economic moat. Because of these qualities, these companies have some type of pricing power. Coca-Cola can raise their prices worldwide by just pennies and it can have a large impact on margins because their products are sold almost everywhere. An increase of just 1 penny on the price of a 12-pack of Coca-Cola would have a larger impact on my investment than trying to increase prices on products my small business sells by 25% or more. It's simply an economy of scale that a small business doesn't have right away.

Time 

The great thing about dividend growth stocks is that it's passive income. I mentioned this again, because it's important. I don't have to work for my money. When I invest my money with McDonald's or Wal-Mart, I am basically allowing them to make money for me. Once I have a portfolio large enough and my dividends are exceeding my expenses, I can basically kick back and cash the checks being sent to me. I don't have to clock in anywhere, I don't have to answer to anyone, I don't have to worry about payroll, business expenses, accounting or anything else that a person running a business would likely have to be concerned with. That leaves me with time, which is something I value a great deal over money. Once my expenses are being met, I can volunteer, spend more time with friends and family, travel, relax or do anything my heart desires. I could even continue to work if that's what I want to do. The key is that my time is mine at that point. And time is not something you can earn, buy or steal. Money can be made and lost and made back again. But once time is gone you'll never have it back again.

Thanks for reading.

This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]

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