Dividends For Wealth?

As the market cools, now's the time to seek income. [The Rude Awakening] December 28, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Dividends For Wealth? [Sean Ring] SEAN RING I wrote this piece in May this year in anticipation of a sideways market move. It’s still valid and I hope you take action on this for at least part of your portfolio. —— Today I thought I’d do a quick piece on dividends, as the market will probably move sideways for a while. We’ve had a big upturn, and August looks like a yawnfest for equity. We’re also at that point in the Presidential cycle when stocks take a breather. [S&500 chart] Not all vintage American cars in Cuba are as well-preserved as this 1953 Chevrolet 210 [Photo by Wikimedia Commons user Laslovarga] So let’s review dividends and their vast income potential today. Two Types of Dividends There are two main types of dividends. One is a stock dividend, and one is a cash dividend. A stock dividend is when you receive payment for part of a stock for every share you already own. The advantage of this is that it's not an actual taxable gain like cash dividends are. Stock dividends are not usually taxed and give shareholders the choice to keep or sell the shares. Stock payouts are also optimal for companies that [lack sufficient liquid cash](. This piece will concentrate on cash dividends because this is the income portion of your total return. The total return is your capital gains/losses plus your dividend, all divided by the stock price. Dividend investing will become increasingly important over the coming months because capital gains will be tough. The ability to rely on dividends as an income return, the dividend yield, will be a safety net for most investors. Why Dividends? The main reason people tell you to invest in dividend-paying stocks is at least one of the following. - You're an older investor. - You're more risk-averse. - You want to create a stream of income for yourself that will last you through your retirement. That’s all good, but let’s say you are a younger entrepreneur who wants to build a solid foundation. There's no better way to do this than with dividend investing. Unfortunately, most advisors tell young investors they can take bigger risks with non-dividend paying stocks. They feel comfortable doing that because if you're young and lose some money, you have a long time to make up those returns. The Sooner, The Better. As Warren Buffett did, a far better and simpler way to invest is to start dividend investing while young. That's one of the reasons why [Warren Buffett’s net worth]( is roughly $70 billion today. He took advantage of the eighth wonder of the world: compounded interest. From a young age, Buffett would buy dividend-paying stocks. And when those dividends were paid out, he could reinvest those dividends to buy more stock. Here’s an easy way to think about it. Suppose you've invested in a tech stock, and it had a lousy year. Say it only had a 4% capital gain. That's all the return you're going to get. But let's say you invest in a “boring” company like Coca-Cola. If it has a 4% capital appreciation, just like a tech stock, but it also has a 3% dividend yield, you earn a total return of 7%. Now, that doesn't show up in the stock charts. That’s why many people, especially momentum funds, pile into tech shares. But you can be smarter by buying dividend stocks to take advantage of that compounded return. [The 2 AI investing traps revealed [must read]]( Investor and entrepreneur James Altucher made millions during the crypto boom. Many “experts” are now saying… [Artificial Intelligence opportunities could be even bigger.]( But don’t believe the hype. Before you invest one penny in AI… See James reveal the [2 AI investing TRAPS]( that will doom many investors… Yes, making money from AI SHOULD be easy… But most AI investors will fall flat on their faces. Because they don’t know the 2 AI investing TRAPS. [See the 2 AI investing traps here now]( [Click Here To Learn More]( Why Don’t All Stocks Pay Dividends? Tech companies like [Microsoft]( in the 1990s and [Apple]( in the 2000s plowed their cash back into their companies to invest in their products. Microsoft had Windows and Office to install on virtually every PC. Apple came up with the iPod, the iPhone, and the iPad in quick succession. They used their cash better than investors would have, had they distributed the cash back to them. But the story is different when mature companies grow less or more slowly. A company's board must pay dividend income to entice fund managers and other institutional investors to own the shares. This makes up for the smaller capital gain. How Do Dividends Work? Luckily, you don’t need to know about dividends accounting. But you do need to know the order of dates for dividends. Here they are: Your company’s board of directors will meet. At that meeting, they will calculate and declare that dividend. That's called the declaration date. A short time later, the stock will go ex. In Latin, “Ex” means “without.” You must have bought the share by the time the stock goes ex to receive the dividend. Theoretically, the stock will drop by the dividend slated for payout on the ex-date. Of course, it may move by more. But the dividend is taken out of the stock price. Because the person who buys it on the ex-date or after will not receive that dividend. Usually, two days after the ex-date is what we call the record date. That’s when the company registrar, who keeps track of who owns the shares, will record the shareholders’ names. Those shareholders on the company register will receive the dividend. An example: If the ex-date is Wednesday, you must own the stock by the market close on Tuesday. Why? T+3 settlement is the norm in equity. That means the trade date plus three days. If you buy it on Tuesday, you've got Wednesday, Thursday, and Friday. On Friday, the cash you pay to the stock exchanges is for the stock itself, and you’ll be the holder of record. Now the company registrar, who keeps track of who owns the shares, will know they must pay you that dividend. Then, a short time after that will be the payment date. That is the date you get paid your dividend. What are dividend stocks? Dividend stocks pay regular dividends... and, hopefully, increase those dividends over time. The more substantial the increase, the better. There are three different categories of dividend stocks. - [Dividend Kings.]( Kings are stocks that have consecutively increased their dividend payments for at least 50 years... so at least a half-century. - [Dividend Aristocrats.]( This is a list of about 50 stocks that have consecutively increased their dividend payments for at least a quarter of a century. - [Dividend Achievers.]( These stocks have consecutively increased their dividend payments for at least a decade. What are the best dividend stocks to buy? The best dividend stocks to buy regularly increase their dividends, such as the three types of shares we just mentioned. When filtering through stocks, we’ll look for stocks that regularly increase their dividend. But we don't want stocks that only increase by a penny yearly because they only do that to remain dividend stocks. We want dividend growth to be between 6% and 10%. Now, why is looking at cutting dividends so important? Failing a regular increase, we want dividend stocks that at least do not cut their dividends. That's important because once a stock cuts its dividend, that is when we want to exit that stock from our portfolio. It’s our “sell” signal. Best Case Study: Warren Buffett’s Coca-Cola Trade Let's talk about one of history's most outstanding dividend-investing trades. [Warren Buffett]( bought Coca-Cola in the summer of 1988, right after the 1987 stock market crash. The price of Coca-Cola at the time was about $10 per share on a split-adjusted basis. Over the ten months from June 1988, Buffett acquired nearly a hundred million shares, according to The Warren Buffett Way. Buffett's average cost per share was $10.96. At the end of 1989, Coca-Cola represented 35% of Berkshire's common stock portfolio. Buffett rounded his position out at 100m shares. Two stock splits later, Buffett now owns 400 million shares of Coca-Cola. The stock market value of Coca-Cola during the 1988 and 1989 purchase period averaged about $15.1 billion. But Buffett understood that the intrinsic value of KO was between 20 billion and 32.4 billion. It was an excellent bet for him to place. At $61 per share, Berkshire's original $1.3 billion investment is worth $25.4 billion. That’s a huge capital gain, but BRK benefits from receiving dividends. His annual dividend now is up to $704,000,000. The cost basis of the total 400m shares is $1.3 billion, [according to its 2022 annual shareholders’ report](. That brings his dividend yield to a whopping 54%! To see dividend investing in action, head over to the [dividend calculator]( at Marketbeat.com. How to make dividend investing work for you. Here are a few tips to help you with your research: - Pick companies that have been around for a very, very long time. - Pick companies that have regularly increased their dividends even during financial crises. - Wait to see which companies survive the coming meltdown because this isn’t over yet. - Look at a 4% dividend yield as a buy signal. - When a company cuts its dividend, that’s your sell signal. Then, make some easy purchases and let the portfolio sit there and compound. Wrap Up I hope that little ditty today on dividends wasn’t too simple for you. It’s crucial to revisit topics we know well to ensure we’ve covered everything. For the rest of you, I wish you a pleasant and restful day. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( [Biden's 2024 Presidential Run Doomed To Fail — Thanks To New Inflation Surge?]( Biden has given America its worst inflation crisis in over 43 years. But if you think the worst of inflation is over, think again… [A deadly new “Second Wave” of inflation is coming – one which could send the price of food, gasoline, housing and more skyrocketing much higher than they are today.]( Will this new crisis mean Biden’s 2024 Presidential run is doomed to fail? [Click here now to see my urgent warning.]( [Click Here To Learn More]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. 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