When you get started with investing on Robinhood, you may want to choose to follow a certain
investing strategy to work towards your goals or give you some guidance through your investing
journey. There are multiple strategies out there, so in this video, I’m going to walk you through
the three main investing strategies, which are dividend investing, growth investing and value
investing. I’ll tell you how these strategies work, the pros and cons of each strategy, and
who these strategies might be best for. Then we’ll wrap things up by talking about how you can mix
some of these strategies together to drive some serious portfolio growth, so don’t go anywhere.
Before we get into things, if you’re new to Robinhood, make sure you check out the
video I did on getting started with Robinhood for a full introduction to investing with the
app. And of course if you haven’t made an account yet, be sure to use a referral code like the one
I’ve got in the description to get a free stock valued up to $500 when you open up your account.
But if you’ve already gotten your feet wet with Robinhood, you’re probably ready to get
a little more serious by adopting some of these investing strategies. So let’s jump
right in and take a look at my personal favorite and the first on our list, dividend investing.
Dividend Investing Dividend investing is a
strategy built around investing exclusively in dividend-paying stocks. By building a portfolio
of dividend stocks, you can collect passive dividend income to reinvest into stocks,
supplement your normal income, or perhaps even completely live off of one day.
And part of the draw of dividend investing is that it’s very simple.
Nearly 80% of the stock market pays a dividend - you just have to invest in the stocks that do.
Since dividend investing is all about receiving dividend distributions from your investments,
most investors, including myself, will focus on stocks that have above average yields.
This is an easy strategy to execute on Robinhood because the only metric
you really need to look at is the dividend yield.
If you’re not familiar, the dividend yield tells you how much cash you will receive on an annual
basis for holding a given stock. So if a stock was trading at $20 with a 5% dividend yield,
you would receive $1 a year for holding onto that stock.
But there are two things you need to be careful of as a dividend investor. First, the dividend yield
might not always be accurate. Most companies pay dividends on a quarterly basis, or four times a
year. The dividend yield might be calculated using just the most recent dividend multiplied by 4,
or it might add up the last year’s worth of dividends. If the dividends have varied in the
last year, the actual dividend yield might be higher or lower than the dividend yield metric
reflects. Additionally, if the stock price drops, this will drive up the dividend yield percentage.
So this means you have to dig just a little deeper to determine the actual yield that a stock
is offering. The easiest way to do this is to examine a stock’s dividend distribution history.
This just takes a simple Google search and you can find this for any company. Looking at the
full dividend history will give you a better idea of the stability of the dividend payments.
If the dividend is regularly increasing or at least constant, the dividend yield is a
pretty accurate metric. But, if you notice that the dividend is fluctuating or worse,
decreasing, then you might want to do more research into the stock to make sure the
company isn’t at risk of further reducing the dividend or even eliminating it altogether.
The second thing to look out for is that not all dividends are treated equally. Most stocks
distribute qualified dividends, which are taxed at the favorable capital gains tax rate. Some stocks,
like REITs and BDCs, distribute dividends that are taxed as income, which means you’ll be paying more
taxes on those dividends than dividends from other stocks. Other stocks, like MLPs, are way more
complicated, but offer really high tax-deferred dividends. I have videos on all of these types of
stocks if you want to learn more. But the point is, you need to consider what kind of dividends
you’ll be receiving, because you’ll be paying more in taxes and might receive less cash as a result.
Unfortunately, Robinhood doesn’t always tell you if a stock is in one of these categories,
so you’ll have to do research elsewhere to identify the tax consequences of your dividends.
In my opinion, the biggest pro of dividend investing is the flexibility to do whatever
you want with your dividends. You can cash them out to use for living expenses or passive income
or you can reinvest them into the stock market. And this dividend reinvestment is actually one of
the biggest advantages of the dividend investing strategy. If you continually reinvest your
dividends into a company that is appreciating in value and increasing its dividend payments, your
portfolio growth will compound and snowball over time, driving enormous growth. Don’t underestimate
the power of dividend reinvesting - a study by HartFord funds found that for the last 50 years,
nearly 80% of investment growth in the S&P500 came from dividend reinvesting.
Another pro of dividend investing is that dividend paying stocks have historically performed better
than non-dividend paying stocks, and with less volatility. Investors tend to hold onto
dividend paying stocks in times of uncertainty, because it offers a safe source of income. This
means that these stocks hold their value better than non-dividend paying stocks in recessions.
The same hartford fund study found that the top 60% of dividend paying stocks,
that is the top 60% by dividend yield, outperformed the S&P500 more often than not.
And although dividend investing is simple and exciting for these reasons,
it’s not without its cons. First, dividend stocks force you to pay taxes on your investment.
As I touched on earlier, you’ll have to pay either capital gains tax or income
tax on your dividends. Even if you choose to reinvest your dividends, you’re still forced
to pay taxes on each dividend you’ve received. Non-dividend paying stocks, on the other hand,
can grow and grow over time, and you won’t owe any taxes until you decide to sell them.
So the taxes on dividends might slow down your portfolio growth a little bit.
Another con is that you are missing out on the opportunities of growth stocks.
Amazon, Tesla, Netflix, Facebook, Google - none of these companies pay dividends,
but they’ve seen extreme growth in recent years. So as a strict dividend investor,
you won’t be holding these stocks, and might miss out on some incredible gains as a result.
And lastly, dividends aren’t guaranteed. A company can reduce or completely eliminate its dividend
at any time, and this is something we saw a lot of in response to the economic impact of covid.
But, you can avoid this by vetting the companies you’re investing in to make sure their dividends
are safe and sustainable. Look for companies like dividend aristocrats, which are companies
that have a track record of increasing their dividend for 25 years. Alternatively,
look at things like a company’s profitability or dividend payout ratio, both of which can tell you
if a company is distributing dividends that they can afford for the foreseeable future.
The reason I like dividend investing is because I want to build a portfolio that pays me passive
income. In the short-term, I’ll reinvest my dividends to accelerate my portfolio growth,
then hopefully start collecting my dividends as passive income in a few years. And as the Hartford
Fund study shows, dividend investing can be a really powerful strategy for long-term investors.
But, if you’re someone who wants to own those exciting, high growth-potential companies,
especially like those in the tech sector, dividend investing might not be for you. Furthermore,
the taxes will be much harsher on your dividends if you don’t hold your investments for longer than
a year. So if you’re interested in day trading or holding any stocks for less than a year,
you might want to look into other strategies. Growth Investing
Growth investing is the opposite of dividend investing in a lot of ways, and it might be for
you if you identify with the forewarnings I just listed for dividend investing. Growth investing
is as simple as investing in stocks that are slated to experience above-average growth in the
near future. But it’s not really as simple as it sounds, because even though this can be one of the
most rewarding investing strategies, it can also be one of the riskiest and the most speculative.
To be a growth investor, you have to be able to identify companies that have the opportunity
to grow rapidly from where they are currently positioned. Large and well-established companies
aren’t typically viewed as growth stocks. Instead, you’re investing in smaller and newer companies
that have a lot of unrealized potential. One example of this is Amazon - several years ago,
Amazon was definitely considered a growth stock. It posted yearly returns over 100% on multiple
occasions. Today, though, it’s reached most of its potential. While it can definitely still grow,
it’s unlikely that it will continue to produce these 50 to 100% annual returns.
So the key to succeeding in growth investing is finding these companies when they’re small,
undiscovered and still have a lot things to accomplish. You
also can’t rely on the fundamentals and the financials much in these situations,
because these companies might be acquiring debt or, perhaps like Tesla,
not even making a profit for a few years at a time. It takes more speculation and
faith in a business’ market strategy to be successful with this approach.
When it comes to the pros of growth investing, the opportunity for capital appreciation is the
big one. Growth stocks are the investments that can produce 50 or 100% returns in a single year.
Most other stocks can’t offer anything near this.
Another pro is that these gains will be tax free until you decide to sell them.
So you can let your growth stocks appreciate for years before worrying about any tax obligations.
But that brings us to the cons, and one is that it could take
years for a growth stock to explode and produce the returns you’re hoping for.
You might experience a few years of no growth whatsoever before that happens - and if the
business you pick fails, it will never happen. Another con is that growth stocks rarely,
if ever, pay dividends. So while other companies share their earnings with investors regularly,
the only way you’ll profit from a growth stock is deciding to sell it.
Plus, as growth stocks are usually new and speculative businesses,
they can be really volatile. Sure, they can jump 10 or 20% in a day, but they can also fall just
as easily. So you have to be able to stick to your guns and deal with that volatility along the way.
Similarly, since they are so speculative, their stocks are often overpriced,
so it can be difficult to tell if you are really investing into these companies at a fair value.
And lastly, growth investing takes a lot of research. You have to put in the time to dig
up the companies with the most potential, because by the time everyone is talking about them, you
might be too late. And then you have to be able to justify taking a chance on a single company,
which requires you to have a lot of confidence and faith in a given business.
Ultimately, growth investing is a more glamorous investing strategy, and it’s probably best suited
for people who enjoy taking a chance on some of the riskier and more uncertain
investments in the market. Like I said, you’ll also have to deal with significant volatility,
so it’s important that you can stick to your investment decisions and not let your emotions
get the best of you when price movement isn’t in your favor. But as we all know,
growth stocks can also be the fastest ticket to making a lot of money in the stock market.
If you’re looking for a safer investment strategy with more predictable returns
that’s built around repeatable strategies, growth investing is probably not for you. Luckily if
you’re not feeling dividend investing or value investing, you’ve still got one more option.
Value Investing Value investing is a
strategy that’s been around for many years, and you might be familiar with this strategy because
it’s what made investors like Warren Buffet so incredibly wealthy. The main principle of value
investing is purchasing a stock when it happens to be undervalued or “on sale”. The theory is
that if you are able to purchase a stock at a time when it’s trading less than its intrinsic value,
then it’s value will eventually experience a “reversion to the mean”,
driving up the price and hopefully delivering substantial returns.
Of course, being successful with value investing requires
you to be able to correctly analyze a stock. Fortunately, this is one of the
few investing strategies that is entirely founded on formulas and calculable metrics.
The two simplest and most common of these metrics are the P/E ratio and the P/B ratio.
P/E ratio is the price-to-earnings ratio, which compares the price of the stock
to how much money the business is earning per share. This is actually one of the few stats
you can see on Robinhood, so you can do some very quick stock valuations without having
to research elsewhere. When the P/E ratio is high, it suggests that a stock is overvalued
or that the market anticipates the business’ earnings to raise drastically in the future.
You’ll see many growth stocks trading with high P/E ratios because of this. When the P/E ratio
is low, it suggests that the company is more fairly valued, and possibly even undervalued.
The P/B ratio is the price-to-book ratio, which I personally like a little more than
the P/E ratio because it’s less influenced by market speculation.
The P/B ratio compares the price of a stock to the value of all of a company’s assets,
such as vehicles, real estate or whatever else the company might own.
In theory, the price of a stock should pretty closely relate to the book value. So, a low P/B
ratio would suggest that a stock is undervalued, and a high P/B ratio would suggest the opposite.
The only thing that complicates P/B ratios, especially in modern times, is that it can be
very difficult to define the value of intangible goods, like data or intellectual property. So P/B
ratio might not be as reliable for companies with more of those intangible assets.
Besides these two basic metrics,
more complicated formulas have been created as value investing continues to evolve.
So there is no shortage of numbers to look at if you want to get into this strategy.
I think one of the pros of value investing is that
there are so many methodologies and strategies for picking stocks.
Unlike growth investing which tends to be a little more speculative, value investing
follows proven principles that make it accessible to anybody who has the time to do the research.
This also helps you invest based on fundamentals instead of making emotional decisions.
One of the cons of value investing is that it can take time.
Undervalued companies don’t suddenly appreciate overnight, it can take years for it to happen.
So you have to be able to ignore the noise and stick to your principals.
Another con is that this strategy does take a lot of research. You have to be
ready to put in the time and look deep into the companies that you’re considering investing in.
So overall, the value investing strategy might be best for someone who enjoys getting deep into the
financial statements and researching a company. You also have to be willing to pass up the more
glamorous or popular stocks on the market because these are not going to be the ones with favorable
value investing metrics. But if you are patient, investors like Warren Buffet and many like him
have proven time and time again that value investing is definitely a successful strategy.
So that’s dividend investing, growth investing, and value investing. Now let me
tell you briefly about how to mix and match these strategies, and why you might consider doing so.
First is dividend growth investing, and I touched on this briefly when talking about reinvesting
your dividends. Dividend growth investing is when you invest in dividend paying stocks that
have a strong history of increasing in price and increasing their dividend yield. And this is a
powerful combination that causes your portfolio to grow exponentially. Imagine buying a stock
that yields 10% at $10. For the first year, you’ll get a $1 dividend. But let’s say you reinvest that
dividend back into the stock, and the next year, the stock grows to $11 while still yielding at
10%. All of a sudden, your investment is worth $12.10, and you’re earning $1.21 in dividends.
So as stock price and dividend payouts continue to grow, that initial investment is paying
off bigger and bigger and your portfolio will increase in value faster and faster.
You can also use some of the principles of value investing in both dividend and growth investing.
So we’ll call this dividend value investing, which is when you would invest in dividend paying stocks
that are currently undervalued. The power in this is that you can get stocks that are traditionally
high dividend payers when they are at low prices. So you’re getting a much higher dividend yield
for your money. Then, when these stocks return to fair or appropriate value, you’ve already secured
your dividend distributions at that lower price, and your capital has appreciated as well. This
is something I’m doing a lot of because of the crash we saw from Covid in March,
and this is also a great strategy when choosing where to reinvest your dividends.
Lastly would be a combination of value and growth investing, which we’ll call value
growth investing. This is actually a strategy Warren Buffet has shifted to in his later years,
because getting a company with a lot of potential at a fair price
is better than getting a company with so-so potential at a great price. So with this strategy,
you’re looking for companies that are somewhat undervalued, but still have great potential for
future growth. However, this can be a little difficult to execute, because many stocks that
fall into this category might not be “undervalued” by traditional metrics. Instead, you’ll have to
compare their valuation metrics like P/E ratio or P/B ratio to similar companies, identifying stocks
that are undervalued amongst their peers. You’ll also have to rely on some of the other analytical
skills involved in growth investing that help you to identify companies with high potential.
What I love about investing is that every single one of these strategies are perfectly
viable options for achieving financial success in the stock market. It really all comes down
to your personal investing style, the goals you want to achieve and how fast you want to
achieve them. You don’t even have to lock into a certain strategy, you can choose to combine
strategies in any number of ways. I’d love to hear what your take is, so leave me a comment
and let me know which of these investing strategies you are using for your Robinhood
investments. And whatever your strategy may be, we’re all in this together, so make sure you hit
that subscribe button to catch my next investing video and I will see you then.Thanks for watching!