Why Investing For Dividends Can Help Build Wealth
Introduction
Joining the U.S. Navy two months out of high school, I knew I wanted something more out of life. After joining the military, I quickly realized that there were a lot of military service members who didn’t invest, at least stock in the market. And definitely not for dividends. I would hear some members talk about investing in crypto, or their 401k’s, but never did they mention dividend investing.
I picked this up when I would read magazines and see Warren Buffett talking about them. I was intrigued that companies would pay you a small portion of their earnings in the form of a dividend, simply just for owning their stock. I always wondered why everyone doesn’t invest in them. And in this article, I give reasons how & why dividend investing is a great way to build wealth.
Limit Your Downside
For me, I didn’t want to spend the rest of my life working. As a military retiree, I’ve seen many of my fellow veterans complete 20 to 30 years only to find another job to continue paying their bills. And although you receive a retirement check for the rest of your life; depending on things like debt, family size, or just their preferred lifestyle, they’re stuck working another full-time job.
And once I made up my mind that I would do at least 20 years, I knew I didn’t want to fall into this same trap. One way I could alleviate this was by dividend investing. Despite it not being as attractive as some other forms of investing, collecting a paycheck simply for investing in a business is something I’ve found exciting.
Looking at the chart below, you can see why dividend investing can be very attractive. Aside from collecting a paycheck from owning a piece of a business, it can also help alleviate downward pressure on your portfolio in times of volatility. For example, Tesla (TSLA), a company that has teased the idea of paying dividends, is down nearly 19% in the past year. A $10,000 investment in TSLA a year ago would be worth a little over $9,000 today. A $10,000 investment in Agree Realty (ADC) would be worth even less at roughly $8,500.
And although $10k in Agree Realty would cause your investment to be worth less currently, you would have received 12 dividend checks over that same period. And factoring in the minimum amount of $437 you would have received, this would be nearly worth $9k, similar to Tesla. In short, dividends help mitigate losses in times of economic uncertainty.
Furthermore, dividends have contributed greatly to the S&P’s returns in the last 5 years. The stock market’s annualized return including dividends is 14.534%, in comparison to 12.715% for no dividends. And adjusted for inflation, the return is nearly 10%. And with some dividend stocks & sectors out of favor currently, this could lead to higher returns in the coming years.
Pay For Unexpected Expenses
Dividend investing also allows you to pay for unexpected expenses should they arise. For instance, another dividend paying company, Costco (COST), awarded its shareholders with a $15 special dividend this past January. If you held 1,000 shares of the company at the time, this would have netted you an extra $15,000. And I’m sure most of you, like myself, could use an extra $15k. Whether it be to pay off a car, mortgage, or student loans. Or it could be used to pay off credit card debt. With higher interest rates causing tighter financials for many consumers, American credit card debt has surged to $1.129 trillion, up from $1.079 trillion in Q3.
Furthermore, say you would have used that $15k to purchase an additional company like Starwood Property (STWD). This would have bought you 720 shares at a price of $20.82 at that time, increasing your income by roughly $346 a quarter. So, although many dividend stocks have periods of underperformance like now, over time they tend to be great investments and ways to boost your income without having to work a 40-hour workweek.
A Way To Give Yourself A Raise
Speaking of 40-hour work weeks, investing for dividends is an additional way of giving yourself a pay raise. Every time I purchase shares of a company, I give myself a pay raise. In the military, we typically receive pay raises every two years, or whenever you make the next rank. Each rank had a cap at a certain number of years, and when you reached that, you no longer received higher income. And depending on your job, making the next rank could be tough.
But for the most part, you received a pay raise every 2 to 3 years. Using a real life scenario, my friend who served with me on my first ship got out of the military and started working a regular 9 to 5, 40-hour work week job. He gets paid on a bi-weekly basis, or 26x a year.
The median employee tenure in 2022 was 4.1 years, the same as 2020. And although no additional data has come out yet, I assume this is similar. As a dividend investor, I invest with a minimum 5-year time frame in mind. That is, of course, unless the company’s fundamentals change, or I find a company of higher quality and better growth that fits my portfolio needs.
For example, if an employee made $29 an hour in 2019 and received the average 4.84% increase every year, their pay would have increased to $33 an hour. A pay increase of roughly 13.79%. So, their monthly income would rise from $4,640 a month before taxes to $5,239 a month, an increase of 12.90%. But they would have had to work countless hours to receive that pay increase.
Now, for example, say you purchased 1,000 shares of VICI Properties (VICI) 5 years ago and walked away from your portfolio only to come back 5 years later. That would have net you $1,150 a year. And looking forward to now, with no price appreciation and no additional shares purchased, your pay would have increased 44.34% from $1,150 to $1,660 annually. On a monthly basis, your pay would have grown 43.75% over the same period. And you didn’t have to work countless hours to get it. You set it and forget it.
VICI Properties has grown their dividend at a 7.76% CAGR over the past 5 years from $0.2875 to $0.415. This averages $0.295 a year. Being conservative to manage expectations, even if they grew the dividend at $.02 a year for the next 5 years, this would grow your income from $1,660 to $2,250, or a pay increase of 35.54% with no additional capital or dividends reinvested.
Of course, every job is different depending on job field, location, etc. But dividends are a great way to not only give yourself a raise, but grow your wealth over time without spending countless hours. From 2019 to 2023 the average wage increase was 4.84%, much lower than the 35.54% you would have gotten with 1k shares of VICI.
Fight Inflation
With inflation remaining stubborn at around 3% currently, the FED has kept interest rates high and this is likely to remain higher a bit longer to get inflation back to their target of 2%. Maybe interest rates will need to be raised a bit further from here for that to happen. But either way, dividends can also help fight the battle. In earlier years of higher inflation, dividends produced a significant amount of total returns for the S&P.
And with many saying the low-interest rate environment is all but obsolete, increasing your income by investing in dividend-paying stocks is a no-brainer in my opinion. And now is a perfect time to scoop up lower-yielding dividend stocks at attractive valuations. Whether it be in the REIT, utility, or even the financial sectors. With many investors now preferring fixed-rate investments like bonds or treasuries, these 3 sectors offer great opportunities at the moment.
Building Wealth In The Red Long Term
With red markets or sectors, investors willing to stay invested for the long term are likely to build wealth if buying at the right valuations. I’m sure most of us who have been investing for some time have bought stocks at premiums. Whether it was because of the quality, excitement, preference of a stock or business, or because we just wanted to invest. In the chart below, you can see the S&P’s dividend has grown nearly 93.5% in the past 10 years.
And it’s in times like now is where wealth is really built. Blackstone (BX) has been buying up companies left and right, especially in the REIT sector (XLRE). They purchased Tricon Residential (TCN) this past January and recently closed on a deal to purchase AIR Communities (AIRC). And with many REITs trading at attractive valuations currently, the asset manager could have more on its list. It’s apparent that BX is taking advantage right now, and investors should be following suit.
In the chart below, both XLU & XLRE are both down in the past year. Because companies in both sectors rely heavily on debt to fund growth, and with higher costs of borrowing in lieu of higher interest rates, this has caused stocks in both sectors to sell off. But I view these as great opportunities to build wealth for the long term.
Moreover, looking out over a minimum of 5-years, both are in the green. And factoring in total returns in comparison to the S&P, both do fairly well at 20.54% & 34.11% respectively. Of course, there are higher returning stocks that have given investors better returns, but that’s why a balance of stability & growth is key when investing for dividends. Every stock will not keep up or outperform the S&P, although we would like them too. Or one could simply invest in an S&P 500 ETF, but where’s the fun in that?
Investor Takeaway
Non-dividend paying stocks like Tesla and Netflix (NFLX) offer investors the chance for massive upside due to their growth potential. But what they don’t offer investors is the ability to battle inflation and blunt the blow from their potential downside. Aside from battling inflation, they also allow consumers the chance to give themselves pay raises without having to work countless hours.
And when many dividend stocks are out of favor due to the current macro environment, now is the perfect opportunity to benefit from potential higher returns than offered by traditional jobs. I’ve seen many of my military friends retire and work a 9-to-5 job to continue paying their bills and funding their lifestyle. While some prefer to work into their later years, investing in dividend-paying companies can alleviate the need to work into old age by investing in high-quality companies that pay dividends.