It’s a game of pennies.
I know, they don’t make pennies anymore, but in the digital age, pennies are still digitally available. And Dividends work almost always in pennies.
I know that there are people who say you can replace your salary with dividends, and you can if you can buy enough shares to turn 25 cents a share into the salary. In other words, if you want 40 thousand a year you have to have 160 thousand shares. If those shares cost 45 dollars each, it will take over 7 million dollars to achieve it.
Now, does that mean that there aren’t better stocks that give more in dividends? Sure. For instance, Johnson and Johnson which is a fairly stable company pays out $5.36 cents per share per year. They pay in quarters so that’s about $1.34 per share. That seems much better and truth be told, I do own some J and J stock but not a lot because it is currently at $226 per share. So even when there are high payouts, it still takes a lot of money to get to where you can live off it.
Some people do, and if you start off early enough in your lifetime, dividends can make a huge difference in the speed at which you accumulate wealth. Most brokers let you re-invest the dividends in the stock automatically, so even if the stock itself doesn’t shoot up in price, you can still be buying stocks without even looking through the stockbroker.
I prefer dividends
When I am buying stocks, I typically make sure that there are good fundamentals, and that I can feel good about owning the stock and then I check to see if they pay dividends. If they don’t, I frequently take them off my list. I do own some stocks that don’t pay dividends, like AMD, Amazon, Intel and the like. Actually Intel was paying dividends when I first bought them. But they stopped when they started needing the money to use in the reshaping of their company. That’s always a possibility that a company might start off with dividends and either stop or reduce the amount. Usually when that happens a lot of investors bail out and the stock price falls as well.
But I still prefer that a stock that I am going to buy pays a dividend. It helps to feel better about any volatility in the stock price. If it goes down, then I can feel ok since I am getting dividends. For instance, Proctor and Gamble just dropped in price below what I paid for the stocks. In that case, I likely will buy a little bit more while the price is down, which will increase my dividend as well, and give me a larger gain when the stock comes back up.
Real Estate Investment Trusts
There are certain types of stocks that I find very interesting called REITs. The thing that makes these special is that they have to pay 90 percent of the profit out to the stockholders as dividends. This sometimes means that the price of the stock is lower and the payouts bigger. My favorite right now is ABR (Arbor Realty Trust). I’m not sure how secure my money is there but has seemed to be a fairly well-run business. The stock right now is $5.79 cents. That means that pretty easily I was able to buy enough that the 30 cent per share dividend would buy at least 1 more share when re-invested automatically. I like this because I can really watch as compound interest works in the long term.
I would love to do the same thing with Johnson and Johnson, but that would cost me a lot more than I have saved in my piggy bank! However, if I were to hold on and keep re-investing for 30 or more years, I might get there. Of course, by then, I would be 100 years old and not even know what I have in there! Like I’m going to make it that far. But maybe I will find a way to get things set up so that my grandkids get the stocks when I’m gone and not give them a clue about how to get it out until they turn 45 or something!
Looking at ROI
There is another way of looking at the Dividends. In the case of ABR the .30 cent per quarter per share with the share price at $5.79 means that it takes almost 20 quarters to get back the money that you spent to buy the stock. In this case, I can afford to buy 30 shares of the stock (a little over 160 dollars) and this means that each quarter I get paid about 9 dollars. It still takes almost 20 quarters to get back the 160 dollars except that each quarter along the way I will make more in dividend than the quarter before because I have about 1.5 more shares of stock. I’m sure that I could figure it out how long it would take but for me, it’s just important to know that it’s happening.
My take on the whole thing is that if you let compounding do it’s thing, and you can take enough time, it’s going to grow pretty well as long as you have reasonable choices of stocks. There are many that I wish I had bought when I was twenty. That’s water under the bridge for me. Maybe it’s not too late for my grandkids.
