Last week, I was going through the archives for this blog. Since there are over 1,300 articles written over almost five years, there was a lot to look at! But a series caught my attention. It was a series of six posts from the original owner of this blog called “The Dividend Key”. They were short posts that spoke to young dividend investors as they referred to well documented researched. This gave me the idea of revisiting the 6 Dividend Keys and produce a 6 Days to Dividend Growth Investing. This series will cover my overall investing process and is addressed more to beginner investors. At the end of this series, you will be in a good position to not only start investing, but also to avoid most newbie mistakes.
So if you are an experienced investor, don’t skip this series right away. Why don’t you share it with a friend instead? I bet he will thank you. You are ready? All right! Let’s start with Day #1.
Day #1 What is Your Purpose when Investing?
The purpose why you invest will direct your investment philosophy as a whole. Funny enough, most investors never stop for a moment to really think about why they invest. As an investor, you want to make money. That’s obvious. But can you answer the following:
Do you want to make money today? This month? This year? Or for retirement in 25 years?
Do you want to earn monthly income from your investments?
What is most important for you; your portfolio yield or your portfolio return?
Are you looking to reach financial freedom through passive income?
The reason why it is so important to know exactly why you invest is because you will track it. There is a very powerful moto in management and it goes like this; you get what you measure. In other words; if you pay enough attention to something and take the time to measure, analyze and modify it to achieve your goal, you will obtain results. Those results will be driven by your measures.
For example, if you measure school grades, you are more likely to work harder to obtain good grades. On the other hand, it doesn’t mean that your study methods are efficient as you aren’t measuring how hard you work, but only the end result. If you want to improve your efficiency at a test, you will measure both the time and quality of studying vs the result obtained. The same philosophy applied to investing.
At the moment, all my available money is invested in a retirement account. Since I don’t need this money for the next 25 years, my main focus is total return. I don’t really mind if I built a high dividend yield portfolio or if I get an equal amount of payouts from month to month. My goal is to beat the benchmark and successfully grow my portfolio. I measure my total return on a quarterly basis and compare it to the overall market and dividend ETFs.
I know other bloggers focus on how much they receive in dividend payouts or how much in yield their portfolio generates. These metrics for me are completely useless. My point is simple; if you build a high yield dividend portfolio and focus solely on the payouts, your capital may lose in value and you won’t even notice! I’ve seen many investors showing poor total returns because they focused on the dividend payments instead of looking at their holding as a whole.
It’s not because you become a dividend growth investor that you have to forget about the basics of investing. The dividend distribution should be seen as a bonus to your investment return, not as the core of growth in your portfolio. I’ve mentioned this several times on this blog but I would rather buy stocks with a low dividend yield such as Apple (AAPL) or Disney (DIS) and see their stock price surging while cashing in my bonus.
In my opinion, you can’t really start investing if you haven’t stopped for a moment find what you are looking for. I will not aim for the highest total return once I retire. Metrics such as sustainability of payments and reduction of volatility will be more important for me at that time.
As you can see, there are no magical answers. Basically, each answer is a good one. You simply have to find why YOU want to invest and build an investing strategy around this thought. Day #2 will be about which investing strategy to choose and why I’ve personally picked dividend growth investing.