This is the #1 benefit of Dividend Investing (and no one talks about it!)

there's a scene in Homer's Iliad where the main character Odysseus is driving his ship past some rocks that he knows is home to what are called the sirens and the sirens basically are beautiful creatures that sing a beautiful song and whenever ships go by the crew members hear the sound of the sirens and they chase after them ultimately wrecking their ships onto the Rocks Odysseus wants to hear the song that the sirens sing but he knows that the emotional pull of the sirens are going to be too much for him to bear so what he does is he tells his crew members fill your ears with wax so they can't hear the sound of the sirens and he tells them look no matter what I do do not set me free and so they tie him up to the Mast his ears are open so he can hear the sound of the siren but as they're passing by uh he you know he's he's hearing it beautiful song but he can't do anything about about it because he's tied his hands behind his back and his crew members are deaf right by the beeswax so they can't set him free and they're not lured by the sirens themselves so they're able to pass by safely while he's still able to enjoy the sound of the music so what does this have to do with investing this video is for educational purposes only they should not be considered investment legal or tax advice it is not offered to buy or sell any security cap performance does not indicate future results investing is received investing is also full of a lot of different Sirens a lot of stocks a lot of strategies a lot of industries that from time to time are basically Sirens right so this the the beautiful sound the beautiful Melody of the CNBC this is it I'm going over the top right here right here right now because I know more than anybody green flashes uh up up up it just tends to Allure a lot of investors into investing in uh whatever the flavor of the week investment strategy is and a lot of times that siren song ultimately ends in investors shipwrecking their portfolios so as an investor one of the wisest things that you can do is recognize your own human infallibility you are not an emotionless creature right so whenever you see a stock price going up up you're going to naturally want to jump into that strategy and if you know yourself well enough you can protect yourself against the future use wanting to do things that you know probably aren't a very good idea the best way I know how for investors of all types to protect themselves emotionally from the various Sirens that the market has to offer is to focus on dividends so in this video we're going to talk about a topic that I don't know that many people will cover which is the psychological benefits of dividend investing so first of all why does psychology matter there's a investment research firm called dalbar that does a study every year it's called the quantitative analysis of investor Behavior so what they do is they look at how investors did relative to how the funds that they would have invested in did and what they consistently find is that investors do worse than the funds that they tend to invest in so for example from 1992 to 2021 so over this 30-year period the S P 500 Index returned an average compound average of 10.7 percent per year that would be enough to grow a one hundred thousand dollar investment to 2 million eighty two thousand two 196 dollars however investors who bought into Equity Funds which would include the S P 500 their returns were actually 7.1 percent per year and keep in mind this is the 100 stock part of their portfolios that would be enough to grow a one hundred thousand dollar investment to just 789 465 and my scale is clearly horribly off but this nearly 1.3 million dollar Gap is almost entirely because of the investors psychology when the market was going up they felt good and they piled into stocks when the market went down they got scared and jumped out of stocks and rents and repeat this is where I think a dividend strategy really shines it provides people with an emotional anchor during difficult markets here's the price chart of well-known consumer health care and Staples company Johnson Johnson you can see that there's been several periods where Johnson Johnson has experienced significant drawdowns in their stock price keep in mind this is a logarithmic scale so this tiny little drop here is actually about a 40 percent decline top to bottom then of course you had 0809 when again the stock dropped by about 40 percent and then there's several periods where the stock basically just goes nowhere for years and years and years the challenge with investing a lot of times is just holding on long enough for the stock to ultimately do what you're expecting it to do sometimes it takes years decades even before that happens and a lot of times along the way there's some pretty harrowing experiences so if all you have to make money in the market is the stock price it can be very difficult for people to have enough patience to hang on throughout the inevitable tough times and you can call it a psychological trick or whatever you want to call it but the fact is that if you focus on the rising dividend stream for Johnson and Johnson and that is the reason why you own the stock chances are that you're going to hold the stock throughout this period here are the annual dividends paid by Johnson Johnson over this time and you can see that each and every year the dividend income increases of course it's a small increase each year and the overall dividend it's pretty small relative to the stock price but these dividend payments add up and most importantly it gives investors a reason to continue to own the stock basically no matter what is happening to the price not only do dividends help investors stick with stocks in bad times but it can actually shift your mentality to where you cheer for those tough times to come and I don't mean you cheer for tough times as in people losing their jobs that's not what I'm meaning at all but generally speaking if you're getting big dividend paychecks you're actually excited when the stock declines in value and the reason is that you're able to reinvest your dividends at increasingly or I guess decreasingly lower prices so if you have a stock at one hundred dollars and your dividend is two dollars and fifty cents every reinvested dividend will basically get you another 0.25 shares excuse me 0.025 shares if however the stock price were to drop to fifty dollars now your dividend the same 2.50 dividend will actually buy you twice as much shares as it once did so now you can buy 0.05 shares and if the dividend continues to increase year after year after year you're going to be able to reinvest next year three dollars and then three dollars and fifty cents all back into buying more stock at lower prices and not only that but these reinvest adjusted shares that you're buying are also going to pay you more and more dividends so the lower the price Falls the cheaper you're able to buy the shares assuming the business is still sound and you still like it at a fundamental level you actually cheer for stock prices to go lower so you can buy more and accumulate more future dividend income dividends also provide you with a tangible savings goal so most of you watching this video are not going to be retired you're going to be accumulating for retirement and one of the great things about dividends is that it gives you a retirement goal that's very concrete and tangible all you need to do in order to retire is come up with enough income that you don't have to work for so I guess you could call this passive income but I think that's an overuse term we'll call it passive but it does require obviously a lot of active effort to accumulate enough passive quote unquote income come but nevertheless once your passive income from you doing nothing exceeds your expenses that basically equals Financial Freedom or retirement if you want to call it that so in order to determine how much dividend income you need to get all you need to do is calculate how much do you think you're going to be spending per year and then you just need to accumulate enough stocks that the dividends they pay each and every year are going to exceed those expenses and once they do you are officially financially free Dividends are obviously a fantastic option for people that are already retired and I think the biggest reason why is that I think it helps people know how much that they can actually spend without relying on the market so as I mentioned the four percent rule says that you can spend four percent of whatever you retire with and increase that amount each and every year with inflation and you will have never run out of money over any 30-year period the problem with this Rule and really any other that's based on market value is that it can kind of lure people into spending more when they shouldn't and spend less when they could so for example let's say somebody retired in 2008 and they had a one million dollar portfolio so the four percent rule says that they could spend forty thousand dollars per year and they could increase this each and every year with inflation and never run out of money of course over the next 12 months the S P 500 dropped by about 38 percent from one extreme point back in October it actually dropped top to bottom by about 55 so let's imagine this same exact scenario only this person decided to wait 12 months to retire so now they're looking at instead of a one million dollar portfolio they're now at a five hundred thousand dollar portfolio and the four percent rule says that they can only spend twenty thousand per year and increase that with inflation so the reality is most likely somewhere in between but the problem is that this person might be spending a little too much this person might be spending a little bit to a little so to speak but if your focus is only on dividend income then I think it makes the equation a lot easier because you're not necessarily focused on the market value of your portfolio you're only focused on what that portfolio can sustainably and the key is sustainably produce over the long term and just because I want to mention it I will make a note to come back to this qild question because I know there's all kinds of people are going to watch this and say well you can just spend 12 invest in qild and we will thoroughly dispatch of that terrible idea in a future video the other great thing that I think dividends do is they help you focus on the business and not the stock ultimately stocks are simply part ownerships very tiny ownerships in different businesses the best investors always think about their stocks in terms of those businesses not in terms of fluctuating stock prices on a screen so if you are a dividend investor you're most likely focused on the profit and loss statement the amount of dividends that the company is able to sustainably pay back to you which inherently puts your attention on the things that you should be focused on in the first place dividend stocks also tend to be more stable businesses that have been more established over the long term so they tend to be less volatile businesses with more stable cash flows which naturally translates to less volatile stocks for example Procter Gamble makes all kinds of different things basically that you need every single day right so you got Pampers you got Charmin toilet paper Gillette razors there's toothpaste batteries you know all kinds of things that basically no matter what happens you're going to always need and buy these things and as a result businesses like PNG and other dividend stocks tend to hold up better in bad markets so for example this is through November 17 2022 you can see that the S P 500 has generated a loss this year of negative 16.5 meanwhile the Vanguard dividend depreciation index which is a basket of stocks that have raised the dividend for at least 10 consecutive years just a general proxy for dividend growth strategy is down 9.5 percent you also see it back in 2008 when the S P 500 like I said dropped 50 percent then actually dropped a little more than that total top to bottom but over the same time period the dividend strategy dropped by just 42 percent and it may not sound like a lot but this difference between 42 and 50 is actually quite significant every percentage that the portfolio declines requires an even larger percentage to make up for the difference so while I think Dividends are a powerful strategy for financial purposes I do sincerely believe that companies that pay dividends tend to reward shareholders more than companies that do not pay dividends now there are exceptions to that I don't think it's necessarily always that dividend stocks are superior there are examples of businesses that should not should not pay a dividend so Berkshire Hathaway is a classic example but those kinds of businesses with those kinds of managers are very few and far between so I think most investors would be better served and stay away from a lot more trouble to focus on dividend stocks I think it offers them a psychological offers you a psychological benefit that other strategies just simply cannot match I think even if you said Nathan QQQ is going to outperform Dividend strategies over the next 30 Years I still think the actual returns realized by actual real-life investors would be greater in the dividend strategy because you wouldn't have as many ups and downs and you would have some of those psychological anchors that would help people stay invested throughout so anyways I think there are a lot of merits to Dividend investing but one of the most underrated is the psychological benefits the psychological effects that it can have on you and helping you relax while you slowly but surely grow wealth over time thanks to everyone who is currently supporting me on patreon and YouTube premium I really appreciate your support I don't make much money at all from YouTube ad Revenue so that really helps me supplement that income and help keep this channel going if you want another way to support the channel you can check out my evaluation course I'll post a link in the description below it is currently on a beta test which means you're able to get it at a discount and you'll get access to all future videos that I add to the course for no additional charge every time I add about an hour worth of content I'll probably increase the price of that course by 30 to 50 dollars per hour so if you want to get into that course now before the prices go up uh like I said I'll post a link in the description below thanks for watching and I will see you in the next video

Channel: Nathan Winklepleck, CFA

Views: 86,745

Keywords: stocks, stock market, investing, investing 101, investing 2022, how to invest 2022, how to pick stocks 2022, best stocks 2022, warren buffett, dividend investing, dividend investing 2022, dividend growth investing, dividend investing strategy

Id: mBXAx2YwJcw

Length: 16min 40sec (1000 seconds)

Published: Sat Nov 19 2022