If you are like me who plans to “Retire Early Through Stocks Investing” but you
haven’t learnt that good quality stocks with dividend payments have been outperforming
the S&P 500 benchmark in the “past 30 years”.
Or the fact that good quality stocks with dividend payments fell less during a bear
market, and advanced faster in a bull market.
Then the video I am sharing today is for you!
Hello everyone, It’s CODY here.
In this video, I will share with you how to retire early through investing in dividend
stocks.
I will also share why it might be a big trap to pick stocks with overly high dividend yields
at the end of the video.
So If you want to know, remember to stay until the end.
If this video is helpful, don’t forget to smash the like button!
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bell next to it!
So you will never miss any video! let’s get right at it!
I will briefly explain What is Dividend？
Dividend is a distribution of a portion of the company’s earnings to the shareholders.
If you have bought shares of a company, you own a small part of the company.
You can say that you are in fact co-owners of the company.
If the company makes a profit, the board of directors of the company can decide to pay
out a portion of that profit to the owners, which is you.
This is called dividend.
Now that you know what dividend is.
you might ask why companies pay out free money.
The purpose of paying dividends is to attract investors.
Just like when you leave your money in the bank, you are expecting some interest in return.
Dividend is the reward for people who hold the shares for a longer period of time.
A healthy company with good management will never pay out the entire amount of profit
as a dividend.
The company also needs money to grow.
Older, established companies will often have higher payout ratios since they have the capacity
to share more of their earnings with stockholders.
Newer companies, on the other hand, will often have lower payout ratios because they need
to retain more of their earnings to reinvest in and grow their businesses.
Dividend is normally paid out on a regular basis just like my viewers usually smash the
like button on a regular basis!
Companies find it important to pay a regular dividend.
Because if a company decides to stop paying dividend, the stock isn’t much attractive
anymore for most shareholders.
And if this is the case, most shareholders will start to sell their stocks which results
in a fall of the stock price.
So now we know that good companies pay dividends and dividend is attractive to investors, how
do we know the percentage of return on our investments generated from our dividend?
Does the “dividend yield change” based on the stock price we bought it at?
That’s a good question!
And this brings me to my next topic on:
How is Dividend yield Affected by Stock Price?
Dividend yield is a method used to measure the amount of cash flow you're getting back
for each dollar you invest in.
In other words, how much bang for your buck you're getting from dividends.
In general, The dividend per share will increase as the company is growing.
As the company is growing, investors will invest more money so the share price will
increase as well.
Now…
Here comes the important part…
If the stock price is hammered because of the entire market sentiment but not because
the fundamentals of the company itself.
The stock price might go down but the dividend per share might stay the same if not keep
increasing.
In this case the Dividend yield will climb higher.
That means investors are getting a better bang for their buck in their investment!
Dividend investors will be hunting for good deals!
Now, If dividend investors hold onto the high quality dividend stocks long-term, is it possible
to retire early from the dividend yield?
And, I am glad you ask!
And this brings me the most anticipated part of this video:
I will show you how it is possible to “Retire Early With Dividend Yield”
Before I dive into how to Retire early with dividend yield I will introduce one key term.
The concept of “Dividend Aristocrat”.
Dividend Aristocrat is a company in the S&P 500 that has paid and increased its base dividend
every year for “at least 25 consecutive years.
That is at least 25 consecutive years!
I am not sure about you, but this sends me a very strong message that this company knows
what they are doing and has been continuously increasing their profits for at least the
past 25 years.
This also means that the company weathered through the financial crisis in 2008 and the
tech bubble in 2000 without cutting profit sharing with the stockholders.
With this concept in mind, let’s look at a real example from one of my favorite dividend
aristocrats “Enbridge”.
Enbridge is a diversified company which has been consistently increasing their dividend
for a streak of 24 years!
Not so much a dividend aristocrat yet isn’t it?
It’s one year away from 25 years, so don’t hesitate to smash the like button so Enbridge
will continue to increase their dividend for another year.
On April 09th 2020, you can purchase this stock at the price of $40 with a dividend
yield of 8%.
I want to be conservative here, so i will only take the 8% dividend yield annually in
my calculation.
If I invest in $100,000 today, I will be generating $8,000 dividend payout per year.
That is $666.66 extra cash flow per month if I want to retire right away.
Ok maybe that’s not enough for a one bedroom rent in Toronto and I don't need the money
right away, so I will reinvesting the money back in Enbridge every year from now.
So my investments grow not only on the original amount invested, but also on any accumulated
dividend yields.
For the ease of calculation, I will assume the dividend yield is still 8%.
By year 10, I could be getting a cash flow of $15,992 per year, which is $1,332.66 per
month If i want to retire in 10 years.
Also, don’t forget!
Good quality stocks tend to appreciate over time.
Dividend aristocrats has been appreciating 12.6% annually during the last decade while
the S&P500 appreciated by 9.7%.
Again, I will be conservative here so I only take the 9.7% in my calculation.
In the first year, That $100,000 not only generates $8,000 of cash flow but also might
appreciate by $9,700 in value.
By year 10, My $100,000 might turn into $252,387 based on the historical data.
This is a 2.5x of my original investments
Now...I know what you may be thinking.
Cody!
A cash flow of $1,332.66 per month is not enough for me to retire, or the annual 8%
dividend payout is not guaranteed, or the annual appreciation of 9.7% might not be accurate.
Those are all valid concerns.
And I acknowledged that.
We made assumptions based on historical data, we educated ourselves on the power of investing
on good quality stocks.
All of these skills have substantially put the odds of retiring early in our favour!
Don’t forget, this return is only based on a lump sum payment upfront.
The returns on dividend and appreciation could be substantially increased if you set a goal
to contribute a portion of your income every month.
Now that we learnt that investing in good quality stocks with a good dividend payout
can help us retire earlier, it’s also very important to know that a high dividend yield
is not the only criteria for picking a good quality stock.
In some cases, overly high dividend yield might signal that this stock could be a dividend
trap.
A dividend trap is a high-yield dividend stock whose payout is simply too good to be true
or to be sustainable.
One example would be CCL.
The Carnival Corporation is the world’s largest cruise ship company that takes tourists
on luxurious vacations trips.
It has been a profitable business when the economy was good and when people had spare
money to spend on vacation trips.
In fact, the company had been consistently increasing their dividend when the economy
was booming.
Not until this February, the global health concern has stopped people from spending on
vacation.
Investors, consequently dumped their stocks and their stock price plummeted 84% at one
point.
Some dividend investors saw the opportunities of owning a stock with a dividend yield of
16.10%.
They might be thinking…
16% of dividend return is the double of Enbridge’s 8% and almost doubled the return of S&P500.
This dream was proven to be very short-lived as Carnival suspended their operation in March.
The company was burning through an estimation of $1 billion dollar a month and continues
to receive lawsuits.
Therefore, it’s not hard to imagine that Carnival consequently suspended its dividend
on March 31.
That being said, so how do we spot a dividend trap?
A Good way is to make sure that the “dividend payout ratio does not exceed the earnings”.
A payout ratio is a stock's dividend expressed as a percentage of its earnings.
For example, if a stock earns “$10.00 per share” and “pays a $4.00 dividend”,
its “payout ratio is 40%”.
I would steer clear of any payout ratios above 50%, with the exception of Real Estate Investment
Trusts which are required to pay out most of their earnings.
In any case, a payout ratio in excess of 100% means that a company is paying out more than
it earns, which is generally unsustainable.
Now that we know not to get too excited about stocks with overly high dividend yields.
I would like to bring your attention to this graph for the third time in this video.
This graph I am showing you over and over again is really worth revisiting and perhaps
even printing it out and posting it on your wall if you are an investing nerd like myself!
Every time there is a dip in the market, you are thinking about selling your Dividend Aristocrats
and saving up your cash on the sideline.
You can refer back to this graph and be reassured that your downside is covered and your upside
is even better!
Also, after watching this video:
If you want to learn more about good quality dividend stocks including dividend aristocrats,
you can watch my top 3 recession proof stocks by clicking here.
Also, If you would like to learn how to invest like Warren Buffet in 10 minutes for “free”,
don’t forget to check out the link in the description and download it for your future
reference.
It took me more than 10 hours to compile only the best of the best into a simple 5 steps
checklist!
Trust me, you do not want to miss out!
If you have any other questions about dividend, let me know in the comment section below.
Hope you all are investing carefully in the time like this.
No one knows if the market is truly in a recovery mode or the market might retest the previous
bottom.
But If you are investing in good quality stocks with a solid dividend history.
You are on the right track for a good night's sleep!
It’s very likely that your investment will recover faster and you will fruitfully enjoy
the dividend payout in the meantime!
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