I’ll be honest with you, I have always been a dividend fan. In fact, I had started to take a serious look at dividend investing early in 2009 while all stocks were really undervalued. Even then, at that time, I couldn’t invest much myself in analyzing stocks as I was investing all my money into the highest dividend payer of all time; my online company.
So I left my RRSP account alone (for US readers, an RRSP is a Canadian program that stands for Registered Retirement Savings Plan and is the equivalent to your 401(k) in US). Now that things are settling down, and that I have realized that I didn’t do much with this account over the past 2 years, I am restructuring my investments. In fact, I’m not restructuring, it’s a total makeover!
After thinking about the current economic situation and my financial status (I’m married, 29, working full time and not afraid of market fluctuations), I have decided to go dividend investing. Why? Here are the 3 reason why I am going dividend investing.
Reason #1: Dividend Investing is for the long run
If I needed this money to buy a house in 2 years, I wouldn’t gamble too much and might ignore most stock investing strategies. However, I don’t plan to use my retirement money until I’m 55 (yup, I’m dreaming of retiring early). Therefore, I have a minimum of 26 years in front of me. What is amazing about dividend investing is that profits grow significantly over time. Imagine if you buy a stock today at $10 and it pays $0.30 per year. That’s a 3% dividend. If you pick the right stock and this company increases its dividend by 5% annually, in 25 years, it will be paying $1.02 per year. That’s a 10% dividend yield! The most interesting part of it, is that the company’s stock will probably grow according so the $1.02 dividend still corresponding to a 3% dividend yield. This sounds like a lot of capital gains!
Reason #2: Stocks are Undervalued and Cash Rich
I don’t care what people say; US stocks are undervalued. If I buy a 3-4% dividend paying company trading at a P/E ratio under 12, I think I’m getting a pretty good deal! So I know that I am not only looking for dividends but also at capital gains. What is nice about dividend investing is that you can always (mostly) count on the dividend even when the stock takes a dip. But right now, the risk of hitting a slump is minimal. On top of that, the fact that several companies that are cash rich could also announce that they might keep increasing their dividends as they did in 2010. Definitely, 2011 will be the year for dividends!
Reason #3: I’m already getting prepared for retirement
I know, I’m only 29 and I am definitely not on the verge of retiring. However, building a dividend portfolio today will help me assessing how much I will receive each month with this portfolio in the future. I am better off building my investment portfolio today so I can retire in the future. Building projections using stocks that pay dividends will help me ensure I will have enough income upon retirement. It would be nice to live mainly off of the dividends without touching my capital during the first years of retirement.
Starting 2011 with a brand new portfolio
Over the Holidays, I will take a break. I won’t be posting until 2011. I will take this time to celebrate with my family and also to take a deeper look at my financial situation. I will sell most of my portfolio (there are no tax implications since it is a tax sheltered account) and start anew for the new year! So I wish you a Merry Xmas and a Happy New Year!