How to Make Money with Dividend Stocks
Dividend stocks are “little cash machines.”
Buy one, and stick it in the corner of your living room.
Every three months, it will burp out a nice slug of cash.
If you save this cash, you will soon be able to buy a few more little cash machines.
Pretty soon, they will be all over your house, spraying cash all over your carpet.
And they will keep doing this-- whether or not you get out of bed in the morning.
That's the beauty of dividend investing.
It's simple.
It's powerful.
And it's one of the best proven ways to build wealth.
Ronald Read spent the first half of his life as a gas station attendant.
And then the rest of his life as a janitor at his local J.C. Penney department store.
When he died at the age of 92, he left behind an $8 million fortune.
All of it in dividend-paying stocks.
Well-known stocks like Wells Fargo, Procter & Gamble, Colgate-Palmolive, American Express, and many more.
If you assume an average 3% dividend yield across his portfolio, he was collecting $20,000 every month in dividends at the time of his death.
At the same time that he was probably making just $13/hour as a janitor.
It's a good reminder that you don't need to collect a massive paycheck to become a millionaire.
You just need to spend less than you earn.
And then invest the rest in dividend stocks.
If you invested just $6,300 every year for 50 years, you’d end up with $8 million like Ronald Read.
It’s something that anyone can do.
In this book, I'll teach you how.
You are going to learn:
• Exactly how to set up your own portfolio of dividend stocks
• Where to set up a brokerage account
• Which dividend stocks to pick, and which to avoid
• How to super-charge your returns
• How to ride out a bear market
• And much much more
I'm going to help you start your own collection of “little cash machines.”
There's no better feeling than waking up in the morning, and suddenly finding that some more cash has been deposited into your bank account while you were sleeping.
As the years pass by, that cash will continue to pile up.
You'll be able to use it to travel the world.
To pay for your grandchildren's college.
To create a secure retirement income.
Or even to buy more dividend stocks.
The choice is yours.
Once you get started, you'll be hooked.
Your life will never be the same, once you see how you can create crisis-proof, inflation-proof income streams in the stock market.
We'll begin at the very beginning.
What is a dividend?
To answer this question, we'll need to remind ourselves what stocks actually are.
Yes, it's fun to trade stocks.
But when we trade stocks, we might forget that each share of stock is actually a piece of ownership in a real business.
When you buy a share of stock, you become a partial owner of the business.
And as a partial owner, you are entitled to a share of the profits that the business generates.
Most mature companies will do 2 things with their profits:
1. They will reinvest some of their profits back into the business in order to grow it.
2. They will return some of their profits to the owners.
Profits that are returned to the owners are called dividends.
If you own a dividend-paying stock, you will usually get paid a dividend every 3 months.
This dividend payment will show up as a cash deposit into your brokerage account.
This cash is yours to keep.
There’s even more good news:
You probably won't have to pay much in the way of taxes on this dividend income.
If you own the stock in a retirement account (like an IRA), you won't have to pay taxes on dividends until after you retire and start to withdraw the money.
If you own the stock in a regular brokerage account, you probably won't pay any taxes on dividends until your annual income exceeds $77,201.
You can read more about how dividends are currently taxed here:
I'm not a tax professional, so be sure to consult one for your personal financial situation.
Even when your annual income is higher than $77,201, you’ll never pay more than 15% to 23.80% taxes on your dividend income.
When you earn money from a paycheck, you could get taxed up to 37%.
But even if you are a billionaire like Warren Buffett, you’ll never pay more than 23.80% on your dividend income.
That’s one of the perks of being an investor.
It’s another reason why it’s always better to have your money work for you.
Rather than you working for money.
Think of each dollar that you invest in dividend stocks as being like a little employee that goes out and works for you every day.
Now it’s time to talk about “dividend yield.”
If you buy one share of The Coca-Cola Company (KO) today, you’ll pay 41.55.
This year, Coke is expected to pay these dividends:
• $0.39 on July 2, 2018
• $0.39 in early October 2018
• $0.78 in early December 2018
You can see the last dividend payment is actually two payments in one ($0.39 times 2).
You can read about these things by going to the Coke website and clicking on “Investors,” which will take you here:
If you add up all of these payments, you will get $1.56.
So if you own one share of Coke today, the company will pay you $1.56 in dividends this year.
If you own 1,000 shares of Coke, you will get paid $1,560 in 2018.
Here’s how to calculate the dividend yield of a stock:
Take the annual dividend payment ($1.56 in this case) and divide it by the current price of the stock ($41.55).
In this case, that gives you 0.03754513, or 3.75%.
3.75% is Coke’s current dividend yield.
It’s a handy way to think about a stock, since it allows you to compare the stock to other asset classes.
Right now the U.S. 10-year Treasury is paying about 3.00%.
And some savings accounts are paying 1.70%.
Savings accounts are essentially risk-free for amounts up to $250,000 (in the U.S. they are covered by FDIC insurance).
The 10-year Treasury is also essentially risk-free, but it can move around a lot in price over the next 10 years.
If you have to sell it before 10 years, you might take a loss.
Coke’s stock is certainly not risk-free.
It could certainly go down 20-50% in a bear market.
But it does pay you significantly more than Treasuries or savings accounts.
We can see this, because it has a higher yield.
Furthermore, Coke has been paying a quarterly dividend since 1920.
And it has increased its dividend every year for the past 55 years.
That makes it a more reliable institution than most governments.
Here’s another cool thing about dividend yields.
Let’s say that you bought some shares of Coke during the 2008 financial crisis.
During 2008, you could have bought as many shares as you wanted at $22/share.
Back then, the annual dividend was only $0.76 per share.
So if you bought the stock at 22, your dividend yield was $0.76 divided by 22, or 3.45%
Pretty close to where the dividend yield is now.
It’s hard to get excited when you see a dividend yield of just 3.45%.
But look what happened next.
Today the annual dividend is $1.56.
That’s a dividend yield of just 3.75%, if you buy Coke here at 41.55.
But if you were wise enough to pick up some shares of Coke at 22.00 during the 2008 crisis, the dividend yield on your investment is this:
$1.56 divided by 22, or 7.09%.
There’s not a single super-safe investment around today that will pay you 7.09% a year.
Even better: this dividend yield will probably move up every year, as Coke continues to increase their dividend.
If you bought Coke in 2008, there’s another way that you’ve made money.
The stock price has moved from 22.00 to 41.55.
If you bought a thousand shares of Coke, you’ve made $19,550 from the stock price moving (41.55 minus 22.00 times 1000)
You’ve also collected these dividend payments along the way:
• 2008: $760
• 2009: $820
• 2010: $880
• 2011: $940
• 2012: $1,020
• 2013: $1,120
• 2014: $1,220
• 2015: $1,320
• 2016: $1,400
• 2017: $1,480
These cash payments hit your account three times every year, whether you were sick or well, working at the office, or lounging on the beach.
Coke had its IPO back in 1919.
You could have bought a single share at the IPO for $40 (that’s not the split-adjusted price).
If you reinvested the dividends that you received over the years, that Coke investment is now worth about $10,000,000.
There’s a reason why many families in Atlanta still speak of The Coca-Cola Company in reverent, hushed tones.
Shares of Coke are passed from one generation to the next, and children are taught never to sell.
“Dividend reinvestment” is when you take your dividends and buy more of the same (or a different) dividend stock with them.
It’s like using the cash from one little cash machine to buy some more little cash machines.
Imagine having some shares of stock that pay you a dividend.
Now imagine that those shares of stock were paid for completely using only the money from a dividend.
And that that dividend itself came from shares of stock that were bought with money from another dividend.
Infinite regress is hard on philosophers, but fun when you’re dealing with dividend stocks.
So how can we find other great dividend-paying stocks like Coke?
To continue reading this book, click here.
