In this article, we’ll explore 4 strategies to get rich with dividends.
I seek financial independence through dividends. Financial independence offers flexibility, freedom, and many more options in life. Getting there is usually the most challenging part.
For dividend growth investors, independence is achieved at the Dividend Crossover Point. The crossover point is the situation where my dividend income exceeds my expenses. Even if I were very close to this point today, I would also like to have some margin of safety to withstand any future shocks that could undermine my financial peace of mind.
In the process of thinking about how to achieve financial independence, I have made a list of some tools that can be within my control. Obviously, in the world of investments, especially stock investments, there are no guarantees of success. Therefore, we need to make the most of the things within our control to tilt the odds of success in our favor.
These are levers that can move all investors, even the less prepared ones. Indeed, by knowing how to operate these levers well you could be more successful than a better stock picker than Warren Buffett.
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These levers are:
1) The savings rate
2) The investment strategy
3) Time in the market
4) Keep costs low
Let’s see them in detail.
1) The most important thing for anyone who wants to achieve financial freedom is saving. If you don’t save money, you will never have the capital to invest to achieve financial independence. In most situations, you have more control over your savings than the returns you will have as an investor. If you earn 50,000 dollars a year, you can accumulate 10,000 dollars in savings within a year if you save 20% of your income. In this case, the annual expense is 40,000 dollars per year. The 10,000 dollars you have saved will be enough to pay your expenses for 3 months.
If you find a way to cut your expenses and save 50% of your income, you will be able to save 25,000 dollars in a year.
The point is not to focus on the absolute amounts but on the savings percentages. The point is that you have a higher level of control over how much you save and this has greater predictability when building wealth than investment returns. Unfortunately, future returns are unpredictable. Dividends are the most predictable component of future returns, which is why I base my future retirement on dividend income.
This is why I felt it was important to keep my living costs low, so I could have a high savings rate and accumulate money faster. Having a moderate lifestyle (not too much, for goodness sake, let’s get rid of some tantrums!) also helps to appreciate the little things more.
2) The second important thing you have under your control is the type of investments you will invest your money in. The important thing is to understand that despite a history of past returns, future returns are not guaranteed. You have no control over the amount and timing of future returns – the best you can do is invest in something you understand and with a strategy you will stick to no matter what happens in the future. In my case, I invest in dividends, possibly with a long record of annual dividend increases. Others made money with trading, real estate, with bonds. The important thing is to find the investment that works for you and stick to your plan.
I chose income because I found this income to be more stable than capital gains income. Also, I only want to spend the dividends, not my capital, when I retire. With this type of investment, I get cash flow regularly, which I can use to reinvest and further increase dividends or spend on my personal needs.
3) The third important tool at your disposal is your ability to compound your investments over time. You have some control over the amount of time you let your capital produce returns.
Over time, one dollar invested today at a return of 10% per year should double in value approximately every seven years. This means that in 28-30 years, the investor should have around 16 dollars for each dollar invested at 10%. Of course, if the investor does not allow their investment to capitalize these levels cannot be reached. Many investors are sold on the idea of long-term capitalization. Unfortunately, a large portion of them end up trading too often for various reasons. One reason is fear during a bear market. Another is the desire to make a quick profit, without letting compounding do its silent work. I’ve seen people panic and sell everything when things go bad. Another reason to sell is to try to time the markets.
In most cases, the investor would have been better off simply holding onto the original investment, so not worrying about timing the market.
4) The other important factor to remember is to keep investment costs low.
What does it mean? It means keeping fees low. Try to keep your costs as low as possible, because this way you will have the maximum amount of money working for you.
You can also obtain an additional return from tax management. Take advantage of capital losses, evaluate instruments that allow you to offset pluses and minuses, and look at bonds with low coupons and certificates. Your returns could also increase thanks to this.
Original article published on Money.it Italy 2023-12-15 06:40:00. Original title: Come diventare ricchi con i dividendi
