all right we're building portfolios everyone's got their way of doing it but I'm going to talk about
a strategy that I think is one of my favorite ways of Building Wealth for the long term today we're
talking about the dividend snowball something I'm using in my own portfolio to build wealth
through passive income Dividends are something that I think are underutilized by people in the
finance Community they're slow they're not super exciting but I think they are reliable and the way
that you can bet on their income for the future is a great way to get this going when you get started
investing it's pretty slow at first you start with a thousand dollars you hope to make ten percent a
year that's a hundred dollars not super exciting but the whole idea is that by the time you get
years down the line you are Building Wealth and you are replacing almost a full years of salary
by doing nothing and that's the whole point about investing so the way that we're going to do this
is using the dividend snowball a strategy that I think that more people should take a look at
today we're going to talk about five important things that you'll need to know before using the
dividend Snowball the first is what is it it's a concept that maybe some people have heard about
maybe some people have not we're going to explain what it is in the video number two we're going to
talk about picking the right stocks a strategy is only good once you've picked out the stocks if you
have a strategy set in place and the stocks you pick aren't great it's not going to do well for
you and you're going to get pushed away from it even if the stock strategy was going to
work pretty well so we're going to pick the right stocks number three we're going to talk about drip
this is the dividend reinvestment that is critical for this strategy to work number four we're going
to talk about how to accelerate the snowball I talked about how it's pretty slow to start and
we're going to talk about a couple ways that you can get this snowball rolling downhill way quicker
and then we'll finish up the video talking about taxes taxes are not fun to talk about but the
way you can minimize them is a great way to build wealth you can make more money or you can try to
spend less money and taxes are a way that we are giving money back that we've made in the market
so we're going to try to avoid that at all costs so number one dividend snowball what is it the
dividend snowball is a strategy that uses dividend stocks to accelerate growth of your portfolio over
time you're using these dividends and they're going to be reinvested back into your overall
portfolio this doesn't work if you have your dividend stocks and you take out the dividends
Dividends are great because you can do whatever you want with them but this Strat strategy is a
hundred percent based off of reinvesting them back into the market and especially back in a
dividend stocks it's the idea that once you start investing you're getting dividends on a regular
basis they can be monthly quarterly annually but you know when they're going to come this
money is reinvested back into the stocks and in addition to your contributions that you're making
on a regular basis this accelerates your wealth building potential a lot faster than just having
your money sit in the overall market and it gives you much more flexibility I mentioned you can do
whatever you want with these dividends at first we're going to want to reinvest them to try to get
this going as fast as possible but some years down the line you're going to be making significant
money tens or thousands tens of thousands of dollars annually based off of dividends and
you can do this to retire early you can use this to pay off a house you can do whatever you want
with it but you need to get it started early the most exciting thing about dividends to me is the
idea of sitting on a beach somewhere and having these recurring dividends being deposited into my
account and I can do whatever I want with them and that's why I think the dividends no loss strategy
is so exciting it's part two let's talk about the stocks that do the best in the dividend snowball
strategy as I mentioned the strategy is only as good as the stocks that you put into it you can
have the perfect day trading strategy long-term swing trading strategy but if you pick bad stocks
you're not going to do well so let's talk about some of the criteria that I use to pick good
stocks these is not Financial advice this is just the criteria that I use for picking my own stocks
for my dividend snowball and they're kind of the ones that have worked for me over the past couple
of months and I guess this full year an attractive part about the dividend snowball is that not every
stock pays a dividend you may hear this and go why would you want to do that it limits the amount of
stocks that you can pick in your portfolio if you look at the total number of stocks that you
can buy in your portfolio it's pretty large you have so many options but since not all stocks
pay dividend it limits the amount of stocks that you can pick and allows you to really narrow in on
the best stocks for your portfolio So based off of that I'm looking for three things the first thing
is the dividend yield that is higher than two percent two percent dividend yield is not super
high you can find dividend yields up to 12 if you really want to but I think this is The Sweet Spot
between two and three and a half percent this is a yield that I think is sustainable over the long
term term and it's going to be able to give you enough money going back into your account that's
going to allow the snowball to accelerate rapidly you can get some stuff like apple that pays
a really low dividend that's really not going to accelerate the snowball over time the stock may do
really well but we're trying to use the dividend payments to accelerate the snowball instead of
picking stocks that are going to you know go up in value or go down and value significantly that's
another great thing about dividend stocks is that on average they have a lower average move than the
overall Market especially the tech stocks that made that mainly people are investing in these
days so number one we want a dividend yield of over two percent a higher yield is sometimes a
red flag if you see a yield that's like eight percent you may need to look to see if that's
sustainable some of the ways that we look at that is the the payout ratio this is a ratio
that shows the amount of earnings that are paid out Dividends are a reward to investors based
off of the amount of money that the company's bringing in and this payout ratio is a ratio of
the dividend payment over the amount of earnings that they're bringing in if that number gets too
high it's not going to be sustainable because the company needs to keep some of that earnings
for themselves to grow and pay their their debts that they have that's why we don't want that high
of a dividend payment and that's why two percent like three and a half maybe four percent is The
Sweet Spot that I'm looking for the next thing we're going to look for is a company that has
been consistent with adding on to their dividend the way that I look at this there are categories
called dividend Aristocrats which means that they've increased their dividend payment every
year for the past 25 years and dividend Kings which are the top dogs these are companies that
have increased their dividend payment annually for the past 50 years that is such a long time and so
exciting this shows that the company has weathered recessions different political parties everything
that could go wrong in a market has gone wrong in the past 25 to 50 years and it's shown that
they are able to have a healthy dividend and paid out on a regular basis and increase it it
doesn't mean that the yield's going up it just means the dividend payments going up so as the
stock price goes up they're increasing it as well doesn't mean the yield is going to keep up with
it but it just shows that the dividend payment is going to increase over time and so that's
why we're looking for criteria two that they've increased it for the past 25 at least 25 years
sometimes up to 50 years and then number 3 we want to make sure that the stock price is going
to increase as well there are some dividend traps out there meaning that there are companies that
have really attractive dividends when you look at the percentage but then when you look at how the
company's done over time it is underperformed the overall market so we're looking for a stock that
has outperformed the overall Market while also paying a dividend example of that is
at T which is the classic example of a dividend trap this was a stock that was paying between a
seven and eight percent dividend which is super attractive especially with the name like at T
that everyone knows then you look to see how it's performed compared to the S P 500 over the past
whatever time frame you want to look at and it has significantly underperformed it so we're looking
for stocks that have outperformed the market and also have a dividend so it really narrowed down
the range that you can be looking for and I think that's a great thing to do the less options you
have I think sometimes the better and some of the things I look for a dividend yield over two and a
half percent going up to around four maybe four and a half percent not too much more than that
we're looking for a company that has increased their dividend payment for at least 25 years and a
company that has output formed the overall Market in addition to the dividend payments let's talk
about the most critical part about the dividend snowball you can get all the rest of it right but
if you don't do this you're really going to miss out on the long-term potential and that is the
drip or dividend reinvestment plan this is the idea of automatically reinvesting the dividends
back into the stocks that you've already owned this can be done automatically now back in the
old days you would get a check in the mail and you had to physically go deposit it and put it
back into the market now you can have it set up with your broker to automatically do it and it'll
buy fractional shares which I think is so much nicer so you can enroll in this program I just
say Google search whatever platform you're using I'm using TD Ameritrade and Charles Schwab you
just look up that dividend reinvestment you don't even have to think about it but this allows you to
increase your portfolio size without increasing the amount of money that you're adding to it and
so you might not think this is going to do a lot but over time I'm going to be getting around 150
worth of dividends for my my house fund and that's just more money than I'm going to be able to add
on to my portfolio it may not seem like a lot right now but 150 bucks is 150 bucks that I was
not having the ability to add into my portfolio that I will have now so this is the crucial part
drip you can do the dividend snowball without it but it is really not going to get going if
you don't have this set up so that's number three number four the thing you're probably asking is
how can we accelerate this plan you're talking about getting 150 a year in dividends that's
not super exciting obviously some of the ways you can do it is you can add more money to it or you
can increase the amount of time that it's going to take time on your side is the best thing that
you can have as a young investor and that's why I think it's super exciting to start investing
early but what are some things that you can do to make sure that the dividend snowball gets going
and one of the things that's really exciting to me at a time like this is buying the dip on these
really well-known stocks dividend yield has to do with a function of the stock price so we talked
about a stock price going up and as a dividend payment goes up it doesn't necessarily mean that
the yield is going up but in general if the stock price goes down the yield is going to increase
and that makes it more attractive because you're getting a higher percentage of dividend payments
based off of the money that you had so when you look at the overall Market stuff is down right
now and this gives you the ability to buy stocks at a lower price but also means that the yield
is going to be higher than it was six months or a year ago so if you have a stock that was trading
for 100 and pays a two dollar annual dividend that's a two percent dividend yield and that is
kind of the criteria that we are looking for but what happens if that stock price goes down to 75
bucks it is now cheaper than it was in the past so it makes it more attractive if you know that
it's beat the stock market on average for the past 25 plus years it makes it more attractive and it
pushes up that dividend yield to 2.67 percent so you're getting a higher dividend yield and you're
getting the stock that you already like at a discount so for a time like this when you're
looking at the market I am looking for stocks that are down significantly from their you know
pandemic highs as an opportunity to not only get the rebound of the stock price but also a higher
dividend yield if things go flat or down for the upcoming future this is very critical to
make sure that you're buying stocks that have the track record of being able to increase that
dividend payment because you don't want to stock those 100 going down to twenty five dollars you're
looking at it and that's an eight percent yield That's so exciting on stock that you already love
that might be too much so there is a an extreme end for pretty much everything in a investing
strategy if a stock price goes down too much that might be a red flag the dividend yield is
not sustainable so you got to look to see what is a reasonable drop for dividend stocks on average
are going to be dropping less than the overall market so if you see a stock that goes from 100
down to 25 that might mean that you need to take a deep dive into what's actually going on there
and number five we're going to talk about taxes and before you click away taxes are something that
you really need to understand we're talking about dividends because it is more complicated than just
buying and holding a stock forever because you're going to have to do it on your taxes every year if
it's in a normal brokerage account so what are some ways that you can minimize your tax burden
when it comes to tax season we're coming towards the end of 2022 and that means that taxes for this
year are wrapping up so you need to make sure that you have an idea of what's going on and if
you're going to have a tax bill you need to have money set aside to be able to pay that Dividends
are taxed in different ways depending on where it's coming from and what type of stock it is so
qualified dividends are taxed at the capital gains tax rate which is much lower than the normal tax
rate if you make under a certain amount of income that could be zero percent is going to show up if
you want to see what type of dividend a stock pays you can either Google it or if you've already been
getting that dividend payment you can go to your history and see what pops up for it I'll
put up right now with my TD Ameritrade portfolio looks like with the dividends that are coming in
so qualified dividends are taxed at capital gains rate that's what we want to see and then you have
non-qualified dividends ordinary dividends that are taxed as ordinary income which is going to be
that normal tax break that you've always seen this is not as attractive but you just need to know
what's going on there and one way to avoid this is by keeping dividend stocks in a retirement account
if you put it in a retirement account especially a Roth account where all the money is going in post
tax all of the gains that you're getting off of that is tax free it makes it more simple for tax
season because you're not going to have to pay the taxes on that and fill out the paperwork for
it and it means all of that growth is going to be tax-free by the time you take it out you do need
to kind of consider when you're going to want this money is this something you're going to want at 40
years old if so maybe a normal investing account is going to be the way to go because if you take
out money out of a retirement account beforehand you may have to pay some taxes up to 25 depending
on how much money you're taking out so always make sure that you have a plan for the future
because if this portfolio starts really taking off and that snowball is going down the hill fast you
might get to the point where it's sitting in a retirement account and you kind of want to
hit that money but you can't get it without that the tax penalty that we talked about so make sure
you know what your plan is for long term just so that you can minimize your tax bill overall
that's something we want to do we're making money in the stock market and we're trying not to pay
it back to the IRS as much as possible so overall that is the dividend snowball this is a strategy
that I've been using for the past year year and a half and I've been using it pretty aggressively in
my retirement accounts as well this is something that I think you're allowed to pick stocks from
a much smaller range you have so many options on the overall Market you can just see how many
videos there are talking about various stocks and options and when you're looking at dividend
stocks it really narrows it down especially the criteria that we looked at so let's summarize
the video overall part one we were talking about what the dividend snowball is it's the idea of
having a portfolio based around dividend stocks and then reinvesting those dividends in addition
to adding money to it consistently and over time the dividend payments are going to increase to the
point where you're able to replace a significant portion of your income without having to do very
much part two we talked about picking the right stocks the criteria that I look for is a dividend
yield over two percent but under four and a half percent it has to be uh have increased
their dividend payout every year for at least 25 years preferably longer than that and then
finally it's had to outperform the overall Market in the past 25 years just because during that time
frame you've had every different type of market conditions that we've seen I've seen recessions
we've seen geopolitical problems we've seen different political parties in charge and it shows
that it can weather the storm and you don't want a stock to go bankrupt if it's a crucial part of
your overall portfolio those are the criteria that I look for number three the most critical part of
the dividend snowball is a dividend reinvestment plan this can be done automatically and by
fractional shares of the stocks that you already own and this is a critical part because this is
what really gets a dividend snowball going down the hill faster and then number four we talked
about accelerating the snowball we can buy stocks at the dip you're getting stocks that are going to
be at a cheaper price so you're going to have the capital appreciation of the stock in addition to
the additional yield yield is a function of the stock price based over the overall payment and
assuming that the payment doesn't decrease that means that yield is going to go up and that makes
it more exciting investment opportunity especially in a time like this where stocks are down
significantly from their pre-pandemic highs and then five we've talked about taxes make sure you
know where your tax burden is going to be at the end of the year if it's in a retirement account
you don't have to worry about that but you do have to make sure that you know that you're not going
to be able to take it out without significant penalties depending on how much money you want
to take out so knowing what your long-term plan is with these dividend stocks is really critical
you don't want to put it in a type of portfolio that you're going to regret in 10 years so make
sure you kind of think it out before you decide where to put these stocks my name is Andy this is
the dividend snowball let me know if you've used a strategy like this or if you're considering using
it for the future and let me know what stocks you use for the dividend snowball that are attractive
stuff I love are avvy which is ticker symbol abbv we have PepsiCo we have Home Depot Proctor and
Gamble these are all classic dividend stocks that have a history of increase in their dividend and
they are a great part of my portfolio thanks for watching if you're curious to see what else I do
on this channel be sure to hit that subscribe button and if you want to see more from me
there'll be a video on screen right now of some other videos I've made in the past about investing
in the stock market so thanks for watching my name is Andy and I'll see you in the next video