Sunday, June 17, 2012

Dividend - Your Crossover Point

Are you a dividend investor? If so, what is the desired outcome that you wish to achieve at the end of the journey?
 
The goal of every dividend investor is to accumulate a portfolio of dividend income producing stocks, mostly defensive in nature - which would in turn give out dividend income to investors. The goal of living off your dividend income to pay your expenses is an achievable objective, though it often takes a lot of capital, a lot of time, probably some skills and also luck in order to get to the crossover point.

For dividend investor like you and myself, the crossover point is the point that is synonymous with financial independence, i.e the ability to be free from a nine to five corporate office type of job. In order to reach that magical point however, a lot of work needs to be done. Investors need to design an investment strategy and then stick to it through thick and thin, while also improving along the way. Some of the biggest dangers to successful dividend investing are not market volatility, dividend cuts or recessions, but investor psychology. The process of accumulating a viable dividend stream will take anywhere from several years for those who are starting out with a large amount to several decades for young investors who are just starting out in their professional careers. Along the way, many investors will lose track of the goal due to sheer boredom or due to lack of patience. Unfortunately, investors who enter dividend investing for the sheer excitement often do not stick to it and will give up halfway. On the other hand, investors who attempt to find shortcuts to speed up the process of capital accumulation by using options and futures, risky growth stocks or massive leverage will likely be disappointed along the way.
 
The key ingredient to accumulating a sufficient dividend income stream include time, DRIPS (Dividend Reinvestment Plan) and regular contributions to your portfolio. The power of regular contributions is important, because this ensures that investors consciously keep working towards their goal of dividend independence by investing in dividend stocks every month. And last but not least, investors need time to let the magic of compunding works to its great effect.
 
Dividend investing takes time, before the amount of distributions reaches its decent levels. Imagine a person who manages to save $2000/month for investment. At the end of the year, the portfolio cost will amount to be $24,000. If the average yield were 5%, this portfolio will generate $1,200/year in dividends, which accounts for $100/month. On the positive side, you can either use the dividends to pay off some of your daily expenses (utilites, phone, internet bills) or simply reinvest it into your portfolio. Once they are there however, and their portfolios consist of wide-moat dividend champions with sustainable distributions, investors will be able to live off dividends.
 
I am now about over a year into investing and every month it gets closer and closer to my target dividend income goal. In fact, I have felt the effects of my dividend, especially the last month in May where I received approximately $2000 in dividends alone. Over the next few months until the year end, i hope that my dividend portfolio is sufficient enough to pay my basic daily expenses.
 
 

2 comments:

  1. Hi B,

    Congratulations are in order here. A significant achievement after slightly more than a year. Keep it up. :)

    ReplyDelete
    Replies
    1. AK71

      My accomplishment is nothing compared to you. When I get to your stage, I can really then congrats myself :D

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