I believe that time spent learning the ropes behind dividend growth investing is worth it. In this article I will discuss why I believe that to be the case. As usual, I will use my experience as a successful dividend investor for this article. In my case, learning about investing has provided me with tangible benefits of being three years away from achieving financial independence, after starting my journey in the middle of 2007. I also have gained intangible benefits to learning such as using knowledge acquired in investing to advance in my work or to find a better paying job. An even better intangible benefit has been the ability to connect with other investors, through this online community called Dividend Growth Investor.
I view the acquisition of investment knowledge in a similar fashion to the knowledge acquisition I did during my college years. There is no guarantee that it will pay off immediately. However it provides the opportunity to better my life. My investment knowledge is my ticket towards wealth. If you dedicate for yourself to follow a system of consistently saving and investing that money to work hard for you in dividend stocks, you have a much better chance of retiring early. This is because you are in control of your own destiny, and not hoping that the government, an employer pension plan or a mutual fund manager would support you.
This do it yourself mentality has helped me pick companies that have been paying me higher dividends in every year I have held on to them. This do it yourself mentality has also helped me to learn about different industries, which has also made my skills more marketable to employers. The nicest thing about doing my own investing is that I can create my own integrated approach to personal finances. This means that I focus on investing, tax planning and cash flows at once. It is highly unlikely that I can find an adviser who is good at investing, tax planning, personal finance and deeply cares whether I succeed in my investment goals and objectives. I believe that by doing it on my own, I gain significant synergies in knowledge. For example, I can extract more value from investments that are temporarily down in price by doing some tax-loss harvesting. Or I can use knowledge of my own personal financial situation and cash flow situation to potentially identify and purchase a temporarily marked down investment, even when I do not have cash on hand for a couple of weeks.
In addition, if I can continue being a successful investor, I can leverage that strong track record into a more lucrative opportunity down the road. For example, I could manage other people’s money. I can do this because investing is a perfectly scalable activity. Once a basic skill set of managing money is acquired, it doesn’t matter whether you manage $5,000 or $50 million, The skills you gain are helpful, because you can manage an increasing amount of funds without any extra incremental investing effort on your part. If you understand how a company like Ameriprise Financial (AMP) earns its profits, you find the company to be attractively valued today, and you believe it to have good prospects for further long-term earnings and dividend growth, you can easily deploy anywhere from $5,000 to $5 million with the click of one button.
Even if I change my mind about that, it is useful to learn about business at my day job and use that knowledge when identifying profitable investments. It is also helpful to analyze investments and use that knowledge in my business or work-related activities. I think that super investor Warren Buffett has said it best with this quote “I am a better investor because I am a businessman, and a better businessman because I am no investor.”
If you don’t know anything about investing, you are much more likely to panic when you hear bad news like we had throughout 2008 to 2009. You would have been very likely to panic during the fears of a government shutdown in 2012. If you do not know why you are invested in a mutual fund, then chances of you doing something silly increase exponentially. Many investors who never bother to learn about investing end up committing the cardinal sin of investing, and end up switching strategies frequently. Unfortunately, they end up investing into a strategy after a period of relative success, and then these investors end up abandoning this strategy at the first sign of trouble only after a brief period of time. If you keep buying high and selling low, you will never compound your money the way you should be. Therefore, spending time learning about investing can be helpful to you.
Even if you end up using an adviser to stop you from doing silly things with your money, you will end up paying dearly for that service. This is because an adviser can impose a fee of as much as 1% on assets under management every single year. In addition, they can end up investing your hard earned money into high-fee products such as annuities or mutual funds with a sales load. If I had absolutely no knowledge about investing, I would have likely used a financial adviser from a place like Edward Jones or Ameriprise Financial (AMP), and end up paying 1% – 2%/year in adviser fees and mutual fund fees. This is why I am so lucky that I chose to invest my own money using my dividend growth investment strategy. I am even more excited about the fact that I am spreading the knowledge to other like-minded individuals through my website.
I believe that most of the accumulation of knowledge with dividend investing is upfront. This means that the time spent learning about a company such as Johnson & Johnson (JNJ) is in the initial phases of the research process. Time spent updating the story should not take nearly as much time as the time to learn about the company initially, Dividend investing is appealing, because after spending time accumulating knowledge about a company, and building a portfolio of good ones at cheap prices, I am essentially getting paid a growing amount of dividend for decades afterwards, even if I don’t lift my finger after that.
The most important reason to do it yourself, is especially if you are a dividend investor. This is because the goal of every dividend investor is to generate a stream of income from their capital, that will pay for their expenses in retirement. This dividend income stream is built from a variety of companies that are properly valued, have sustainable dividend payouts, and have managed to grow earnings and dividends over time. I am not privy of any product out there, that can provide a one size fits all approach to income investors. Most dividend focused funds or dividend focused ETF’s have not managed to grow annual dividends for at least five years in a row, since they are subject to high investment turnover. This is why I don’t use dividend ETF’s in my investing. I also don’t like mutual funds and ETF’s because I do not want to be at the mercy of a manager or a committee, which can change the portfolio strategy or relax quality standards on a whim.
By studying market history I had learned that stock prices can go nowhere for up to a quarter of a century. I also learned that the amount and timing of future capital gains to be unpredictable. I learned that dividend payments are much less volatile, as they tend to gradually go up every year. The only exception over the past 90 years were the Great Depression and the Great Recession. If you get a 95% success rate ( defined as dividends growing in a given year or mostly flat for the year), that is good enough for me. This means that a strategy where the investor lives off only on the dividend income produced from the portfolio, is safer than selling off portions of your portfolio. When you are retired, you need a stable source of cashflow that will meet or exceed the bills you have to pay each month. This is where dividend growth investing has definitely helped in evaluating how prepared I am for financial independence. At present time, my forward annual dividend income can cover somewhere between 75% – 80% of my annual expenses. I expect this to meet or exceed my expenses around late 2018.
When I invest $1,000 in a company like Johnson & Johnson (JNJ), I can generate $32.80 in annual dividend income that is very likely to grow above the rate of inflation over time. If I earned $20/hour from my day job, this means that for every $1,000 I invest in a company like Johnson & Johnson, I earn enough passive dividend income to allow me to work one and a half hours less per year. This means $32.80 less in annual income that I need to worry about. With each $1,000 I put to work, I see immediate increase in annual income contributions from my portfolio. If you learn to accumulate income producing assets that way, you will be able to achieve your financial goals, where passive income exceeds expenses. And if you do that, then spending time learning about dividend investing wouldn’t be a waste now, would it?
To summarize, I am a very big proponent of investing time to acquire knowledge about investing. This knowledge has paid off for me big time for me in:
1) Increasing my earnings potential as I become an employee with more marketable skills
2) Cutting unnecessary costs like adviser fees, taxes, management fees
3) Made it easier to network with other like-minded individuals
4) Made it possible to identify investment and work my way towards them
5) Could help me transition into another role in the future that could generate even more income for me
I believe that those who choose to increase investment knowledge over time will increase their odds of achieving success. The future payoff will not always be easily quantifiable at the time of acquiring the knowledge. However, taking a risk and acquiring this knowledge will increase the probability that a favorable outcome is accomplished. Plus, learning is fun, and can make life much more enjoyable.