Why Dividends rock

Buying stocks is by some people considered more or less a gamble. Especially in Germany where I come from, people tend to be great in avoiding debt (most Germans actually don’t even have credit cards), having large savings accounts and an array of insurance contracts to protect them from anything that might happen. The dream for most is to buy a condo or a house someday, for which they set up specialized savings-contracts that will allow them to get real-estate-bound loans with discounted interest – and still to keep paying back the debt after utilizing the contract until the very day when they reach – or even fulfill (meaning finish) their retirement.

It would be probably very unprofessional to call this boring, but that’s exactly what I feel about it. Not only is it boring, it’s also highly inefficient and while risks are clearly well managed in this scenario, this model also eliminates any kind of opportunities.

In my Good Reads section, you will find a book recommendation from Robert Kiyosaki, who gives a great definition of the two most important terms for any investor: Assets and Liabilities. While I always had doubts about considering a house or a condo an asset, I can say that this book absolutely confirmed my skepticism.

I am not saying that buying a house or a condo is wrong. If you want it, or need it and/or can afford it, then, by all means, go ahead. But as an investment, I prefer stocks for a very simple reason: A house or condo always incurs additional costs and time effort, in the short and especially in the long run. Stocks, don’t. You don’t need a fortune to start investing in stocks and to reap rewards, stocks are easier and faster to buy and sell and there are fewer regulations to follow. For a 100 EUR, you can get a couple of bricks that will do for you… nothing. But for a 100 EUR, you can also get 2 shares of Starbucks, that will instantly start paying you 0,50 EUR each quarter (or 2 EUR a year) as of date today. And not only that, with Starbucks increasing it’s dividend every year, chances are that this 2 EUR will turn into 4 EUR after 3-4 years. And 8 EUR after another 3-4 years. And 16 EUR…. and so on.

Successful companies share their profits with its shareholders.

This is called a dividend. There are plenty of successful companies on the market and most of them are the ones that you are used to supporting in your own, daily life. Starbucks is one example, but so is Apple, or Microsoft, Colgate, Visa, etc.

Every single product, software or service we use and pay for has its origin at some company. If we already support this company for its products and services, why wouldn’t we trust in becoming a shareholder of it and claim the generated profits back in the form of dividends?

I already showed some broad calculations on the concept of dividend returns in the TIME IS YOUR BIGGEST ASSET article. Of course, there is a risk, but calling it a gamble is vastly overstated and the profit potential is exponentially larger than for any house or condo.

To put it into perspective: If you start and invest early enough in a few strong dividend payers who constantly increase their dividend payouts, even a “small” portfolio may have the potential to cover significantly more than your retirement expenses.

Great companies survive market turmoils and keep paying dividends. Once you have such a company in your portfolio, you don’t really worry about a stock crash or political unrest, another election or whatever may cause a disturbance.

What I have done so far is to invest in several companies which pay out dividends in different months. Some companies pay out dividends every single month. This way I have effectively created a stream of income that adds money to my account 4-5 times each and every month of the year. We are not talking big bucks here. It’s 20$ here, 15 EUR there, another 50 EUR then and so on, but it sums up. German companies pay only once a year, so they distribute bigger amounts at one time while US companies split the payouts on a quarterly or monthly basis. UK companies pay mostly twice a year. Dutch companies on a quarterly basis.

I expect these payments to double every 6-7 years and very possibly even earlier, as I am adding more stocks whenever any of the companies I am invested in drops cheaper in price.

Not to sound repetitive, but Warren Buffets investment in Coca-Cola is paying him annually approx. 40-55% of his investment back in form of dividends – year, by year, by year. I really don’t see any reason why anyone of us could not follow his footsteps and reach the same target. And just imagine what this could mean for your retirement: Even only a small amount of 50.000 EUR in your portfolio might have the potential to generate for you annual returns of 20.000-27,500 EUR. This is already more than the minimum pension guaranteed by the German social security system for people without any savings. What if you can double it? Or more?

Disclaimer: I am long Starbucks, Apple, and Microsoft. This means that I owe shares of these companies. 

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