The Problem With Dividend Investing (For Passive Income)

oh hi halloween came early and i decided to dress like a moon pie but i love to invest in dividend growth stocks and basically what that means is i hold on to stocks that magically pay me money kind of like this watch this money two three they told me dividends are gonna be easy i don't know it's gonna be that easy now i sort of build my youtube channel talking about my love for building passive income and investing in dividend stocks but in today's video i kind of wanted to show you the flip side of the coin and tell you all the reasons why dividends are not the best investment strategy and why dividends don't really matter at all so if that boring dry video topic idea sounds good to you then you are my peeps chest bump you nerd this video is for you let's begin [Music] hi my name is andre jake hope you're doing well hope you're staying safe and first i'm gonna make you fall in love with dividends by giving you all the reasons why i love dividend investing and i'm gonna keep this very simple and easy to understand if you're not sure what they are and then i'm gonna make you hate dividends by giving you the complete counter argument and then i'm gonna make you fall in love again so basically this video is completely pointless almost like crossing a missionary person with an atheist hi oh nothing i just wanted to knock on your door for absolutely no reason at all okay bye okay don't forget to smash the like button though all right i think i'm losing it 2020 is getting to me so let's begin with the pros and cons starting with the four major reasons why i fell in love with dividend investing and why you might want to consider it as well the hartford study so here the study showed that dividends that were reinvested represented a pretty large portion of how the stock market made its money so let's time travel back to 1970. you guys remember this guy time wizard if you don't let me refresh your memory dual monsters yeah so if we go back to 1970 that's almost 50 years of data and it shows that dividends that people received and then reinvested back into the stock market represented 78 of the entirety of the stock market's total return and if we go back even farther than that we get thousand dragon just kidding we can't go back that far but we can go back to 1930 up until 2019 which gives us almost a century worth of data and it shows that reinvested dividends have accounted for around 42 of how the stock market made its money which of course is a lot lower but that's still a pretty significant portion over the last 200 years money that's been invested in the stock market has traditionally returned anywhere between eight to nine percent but that doesn't mean that people have made that much in fact the black rock investment firm research shows that on average in the last 20 years people have returned only a 2.1 return which is barely above inflation and that's not very good and the reason for that is because when the stock market dips people panic they sell their stocks and then when they see the stock market recover they jump back in but they missed out on all the growth but being a dividend investor gives you the staying power to actually realize those advertised nine percent returns in the stock market that's because you don't need to sell your stocks to realize and make that profit because all along the way no matter what's going on in the stock market you are still making money and collecting it sort of in the form of interest therefore you are less likely to panic and sell and become a statistic of your own emotional doing imagine your name is kevin and you owned two million dollars worth of tesla stock totally hypothetical scenario that would be crazy if a person like that existed but imagine you're kevin and you realize making six videos on youtube a day is definitely not sustainable and when you're 40 you want to slow down and take a breath so there's a problem with that because kevin stock in tesla went all the way up to 6 million except he never sold and he held on because he was a long-term investor but the stock market crashed or maybe a new competitor emerged or maybe we discovered fusion power and something else happened regardless the tesla stock crashed all the way back down to 2 million or even lower just as he was about to retire and make his hypothetical wife lauren happy he realized he just lost 10 years worth of progress that's almost as emotionally crippling as my anxiety and that is not a hypothetical scenario that happened to a lot of people back in 2008 they lost their iras their 401ks the values plummeted putting off their retirement in some cases indefinitely so the moral of this story for kevin here is kevin's gonna be all right he's still got millions of dollars it's you and me that need to worry but kevin if you're watching this brah please just sell a million dollars worth of that tesla stock just pay those taxes i know it hurts invest the rest of it into a dividend yielding etf at three to four percent you're going to secure a middle-class lifestyle for eternity earning 30 to 40 000 a year doing nothing that you can pass down to your wife or to your kids and now you're secured and diversified like kevin o'leary would say you got too much real estate and for that reason i'm out just kidding i'm back now you might have heard of the saying you can't put a price on a peace of mind and because i come from an immigrant family that never taught me how to take risks i love dividend investing because it's focused on cash flow so for example if coca-cola had a really bad quarterly earnings report i don't really care too much because i know i will still continue to collect dividends as long as coca-cola continues to do its thing as long as people continue to drink soda which they will as long as people continue to be addicted to sugar no matter what's going on in the world i will still be paid even during the 2020 pandemic as the stock price decreases the dividend yield increases so for example let's say that coca-cola was worth a hundred dollars and it was giving us a dividend yield of four percent so for every 100 that we invest in coca-cola it's gonna pay us four dollars per year but here's what's cool about that four dollars because even if the price of coca-cola gets cut in half down to fifty dollars a share that four dollars will still remain constant and that's because as the stock price goes down the dividend yield increases to compensate and make up for the difference and that's pretty cool because then i could take that four dollars and use it to actually pay my bills or reinvest it back into coca-cola or any other company that i want and for anyone that says that dividends are irrelevant well my paid off bills and my yu-gi-oh collection says otherwise now let's talk about why dividends are bad and why you might not want to be a dividend investor dividends are not guaranteed and this is 100 true in 2020 alone dozens of companies have cut their dividends one of the companies that i owned delta cut its dividend another company that i thought it would never happen to in a million years disney cut its semi-annual dividend which happened in july and they paid out twice a year and they cut that one so imagine if you're a retiree that is depending on dividend income to pay your bills and you don't get paid that month you can't afford to pay your bills and that's because we are not owed dividends there is no written contract between ourselves and the companies that we invest in that they owe us anything and at any moment they can substantially decrease that dividend or even worse get rid of it entirely and usually when that happens the stock price falls even more my rebuttal to this is stock growth or capital appreciation where i a studious man is actually not guaranteed either because when 2008 happened and the stock prices fell the dividend income actually fell by about half of that so dividend income is actually a lot more stable and a lot more predictable than capital growth because as we get paid we can reinvest it back into more dividend stocks giving us potentially more superior returns especially in a flat market that's not doing anything it's going up and down but the result is the same because we're making income and reinvesting it back and if you're afraid of losing dividends then just invest your money in a high quality dividend etf that replaces companies that cut their dividends automatically dividends limit the total growth and returns of a company because think about it if a company is paying dividends to shareholders that's its way of saying we have so much money we have run out of ideas on how to grow our company so have some money back so that means that stock will probably not grow in price as fast and as quickly as something like tesla in fact it might mean that it's a dying company because it's no longer innovating when compared to something like tesla because tesla's constantly innovating and creating new products in fact when compared to vti the golden standard of index investing from vanguard to something like vig which is vanguard's dividend growth golden standard equivalent then you can see that vti over the last 10 years has outperformed vig now that's not been true across every time period but in the last 10 years it has touched actually that's not entirely true all the time there's a few studies that show that dividends have actually been responsible for a pretty big portion of the entirety of the stock market's returns in fact companies that are done growing doesn't mean that they're done making a ton of money it just means that they won't grow at double-digit rates like some of the smaller companies but in return for making a ton of money they reward us a portion of their profits and they increase their dividends over time and i will link some of those studies down below because making sense of them will put both you and i to sleep but the data is there if you want to look at it dividends are not free and you will pay more in taxes and think about this when we receive dividends it's coming from somewhere so when the company pays us dividends that stock price will decrease by the same amount as the dividend that was paid and so all you're doing is you're just moving money around from one place into another sort of like moving money from your savings account into your checking account you could consider that as income technically but all you did was just move money from one place into another and while you made that transfer you got taxed which is completely pointless in contrast to something like growth stocks where you don't get hit with those taxes because there's no forced withdrawal so you pay less in taxes i will say though that this is one of the strongest arguments against dividend investing technically yes it is a forced withdrawal but i will say this if you're worried about the dividend stock price dropping by the same amount the dividend is paid out just remember it doesn't just go to zero that's not how it works the stock price eventually recovers in just a few weeks and sometimes nothing happens to the price and sometimes it even increases but if you're worried about paying taxes just invest in a roth ira account and the income you receive in that account doesn't get taxed at all but if you're someone like me who invests in a taxable brokerage account then yes you will pay a small premium in taxes for getting that income but that's worth it to me for having the option of retiring early and having that passive income well consider this though if you're retired you're probably gonna make less money in retirement because you've slowed down right and in that case you can make as much as 39 375 dollars and pay zero in taxes if filing forever alone but if you're filing jointly you can make together as much as seventy eight thousand seven hundred fifty dollars of qualified dividend income and pay nothing in taxes tell me again what sort of income can you make almost eighty thousand dollars a year on and pay nothing in taxes right the one that all the ultra rich people have that makes sense it decreases diversification think about it when we invest in dividend stocks we're only putting our money where there are big established companies only and we're missing out on the mid and small cap companies that have the potential to become the next apple the next tesla the next google the next amazon because when they're only growing they're not going to pay us dividends and so we don't invest in them until they become big and so we missed out on all that growth so it decreases diversification my response is yeah that's technically true but there's nothing in the rulebook as a dividend investor that says you can't buy small cap stocks you can do both if that's what you want dividend investing only gives you emotional benefits and it gives you no real advantage over just regular index and growth investing other than just making you sleep well at night and to that i'll say half true half not true because as i said in the beginning of the video there's no price that you can put on a peace of mind and good investing is just as much of an emotional game as it is a numbers game so as a dividend investor i can focus on cash flow rather than worrying about what my stock price is doing day to day meaning i can stay in the market a lot longer and have a better retirement rather than worry about how to best time the market to sell my stocks and make my exit and that's a very very powerful thing the fact that people argue about this stuff on the internet to me is amazing because it's first world problems the fact that you're watching this video probably on your phone and you made it this far means that you're a money nerd and you're probably going to do better than 99 of the rest of the world and just remember there are many paths to get to the same end result that we all want which is basically just to end up with more money than what we started with and while you're on that journey don't forget to get your two free stocks one from weeble by signing up funding your account one hundred dollars you'll receive one free stock valued up to sixteen hundred dollars you get another free stock from robinhood you can follow me on instagram i post from time to time join my free discord group love you thank you so much for watching this video i will see you back here on monday and friday sometimes a wednesday take care bye [Music] please [Music] this [Music] you

Channel: Andrei Jikh

Views: 604,147

Keywords: dividend investing, dividends, passive income, robinhood, dividend income, How to invest, Robinhood, dividend, stock market, how to be a millionaire, stocks to buy, best investment, investing for beginners, how to start investing, stocks for beginners, robinhood app, how to, invest, stocks, andrei jikh, Passive income, credit cards, how to invest in stocks, how to invest money, selling my stocks, how to invest in your future, how to invest in the stock market

Id: nmEJSulqDr4

Length: 15min 14sec (914 seconds)

Published: Fri Sep 25 2020