What are dividends?

Episode 1: Growing a Dividend Portfolio

Thank you Alexander Hamilton!

I am not throwin' away my shot
I am not throwin' away my shot
Hey yo, I'm just like my country
I'm young, scrappy and hungry
And I'm not throwin' away my shot.

-My Shot from Hamilton

Just finished watching Hamilton on Disney+! If you haven’t already, subscribe to Disney+ and watch it. Just amazing! Alexander Hamilton is the founder of our current financial system. Crazy to think that one man could help start something that would become this powerful across the world… the platform that allows companies like Apple, Amazon, Microsoft, Disney and many others to succeed.

The show really encouraged me to read the book Hamilton by Ron Chernow… and then I saw that it was a hefty 818 pages. It might have to be weekend read for me 🙂

Alexander Hamilton believed that a central US bank could help provide liquid capital to spur commerce and build the US into a commercial powerhouse (quite the insight). And we see this at work with the Covid-19 crisis shuttering businesses and hindering economic growth. The Federal Reserve has stepped in and infused capital into the markets and businesses to try to bridge the gap to profitability. Whether or not it is enough has yet to be seen, but the ultimate goal of a business is to become profitable, or remain profitable, even in this volatile time period.

What are dividends?

Profitability is simply the remainder of money a business has left over after all of the expenses, interest, and taxes are paid. That business, if profitable, then has two choices: (1) the business can use the extra funds to spur future growth, or (2) the business can give the owners an extra payday by sharing the profits with them. The business can also combine these two aspects and get the best of both worlds.

Most businesses that look to grow rapidly or find themselves in a highly competitive market will take the profits and reinvest 100% of them back into the business. Other companies will use a portion of those profits for growth and a portion given out to the owners as a form of payment called a dividend. And then there are some companies that are required to pay out 90% of their profits as dividends (see REITs).

So simply put, dividends are a payment from the profits of a business to its owners (or for publicly traded companies like Disney or Microsoft they are called shareholders since they own shares of the company called stocks).

Typically, dividends are paid out quarterly (every three months) to the shareholders for each share of stock they own. As of 8/9/20, Microsoft (Ticker: MSFT) will pay a $0.51 dividend each quarter for each share of stock someone owns. If I own 100 shares of Microsoft, then each quarter they will pay me $51. And each year they will pay me $204, just for being an owner of 100 shares of their stock. Combined with Microsoft’s potential stock price increases over time, this is the Muhammad Ali 1-2 combo that led me to create a dividend portfolio.

Keys to our Dividend portfolio:

  • The Dividend Portfolio is located in a taxable brokerage account. This is the portfolio that Lizette and I will live off prior to hitting the age of 59.5 when we can tap into our retirement accounts.
  • Every two weeks we deposit money into the account, using 50% of the funds to purchase specific high dividend ETFs (exchange traded funds or an investment fund bought/sold on the stock exchanges that holds multiple stocks within the fund) and 50% of the funds to purchase high dividend yield stocks of publicly traded companies.
  • There is no limit on the number of dividend stocks in the portfolio, but each stock in the portfolio is required to have strong leadership and employee satisfaction, pathways to growth, a growing dividend, a consistently high dividend payout to shareholders, and the ability to make the dividend payment in good times and bad (like our current situation).
  • The only time a sale would occur is: (1) if the stock stopped paying a dividend (something that has me hesitating to buy Disney for this portfolio at the moment because they have stopped their dividend due to the challenges of Covid-19), (2) if there are no more pathways to growth over time, or (3) if another company/ETF is believed to be a stronger replacement.

Our Current Dividend Portfolio

Stocks purchased this week:

  • Stocks:
    • JPM – JP Morgan Chase
    • HAS – Hasbro Inc
    • EXR – Extra Space Storage
  • ETFs:
    • IDV – iShares International Select Dividend
    • SPHD – Invesco S&P 500 High Dividend Low Volatility
    • SPYD – SPDR S&P 500 High Dividend
    • VTI – Vanguard Total Stock Market Index

Stocks Sold this week:

None this week.

Overview of the Dividend portfolio

The ultimate goal of this portfolio is to make more dividends from the portfolio than we would have if we had just invested in an S&P 500 index fund or ETF. A secondary goal would be to also outperform the S&P 500. We are easily beating the S&P 500 in the yearly payout of dividends, currently by almost $347 per year. Although we are losing to the S&P 500’s gains by -2.63%. Regardless, the account is still performing better than if it was placed in a savings account, and it is returning 3.94% per year in dividends. No savings account gives me that type of interest right now.

Nothing compares to a crayon drawing:

Do not purchase a stock that you cannot explain with a crayon drawing (from one of my must read investing books, Beating the Street by Peter Lynch).

If you have any initial questions, then leave them down below in the comments section and I will do my best to answer them for you.

At the least, you can get started by opening an investment or brokerage account. My favorite starter account is Robinhood. You can open up an account in minutes and they will give you a free stock. Plus, if you use my link below, then Robinhood will give me one free stock too.

Click here to start an investing account!

Disclaimer: These are my own personal thoughts and opinions on investing and finance. I may own companies discussed in this post, and I may have recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you read here. Please make sure to do your own research prior to investing any of your money.