Why Dividend Investing?

In this article I will explain my decision to invest to dividend paying companies as opposed to other forms of investments.

Firstly, I think most of investment forms are good in general. The choice depends on what you are trying to achieve, size of employed capital, your expertise level in certain fields or even your character type. These are examples of possible investment types I could think of at the moment:

• Real estate;
• Collectible coins;
• Collectible art, toys, cars etc.;
• Cryptocurrency;
• Growth stocks;
• Day-trading;
• Index investing (mutual funds);
• Peer-to-Peer lending;
• Dividend growth stocks.

Let’s go through the list of investment types and compare them:

1. Real estate – I consider this to be one of the most popular investment types in Lithuania due to its understandable concept, stability, high return and not needing to work a lot in order to get a return on your investment. I am talking about buying an apartment and renting it for monthly income. The biggest barrier is the cost of initial investment. Also, you need to make a lot of research and have expertise in real estate market. Usually, the location of property is one of the biggest factors in determining profitability of it. With very rough estimations, I would say that yield can reach 4-7% yearly (not counting renovations). For example, a 55 sq.m. fully furnished apartment (in the house where we also rent a flat) costs around 145 000 EUR. If you rent it for 500 EUR/month, it would earn 6000 EUR/year which translates to  4.1% of apartment’s value. Of course, this is just a rough estimate and it does not include the time when the apartment is not rented or when something breaks and you need to replace some equipment or make a renovation. On the other hand, if you find a good value deal, have time, knowledge and patience to arrange all the installations yourself, the profitability would grow (if everything goes according to plan). Therefore, I would consider this kind of investment at some point in the future but I would not be able to do that just yet.
2. Collecting coins is an interesting choice of investment. I have a colleague who claims that annual profit is ~30%. It sounds really good but I think this is just profit on paper. It turns out that he is speaking about the value of coins and how it is growing from year to year. In order to turn profit to cash, there needs to be someone who actually agrees to buy the coins from you. It is hard to know when it is worth selling the coins or entire collection. The value of coins is determined how much people want to have them and how much they are willing to pay for it. The coins themselves are not generating any sales, they are not making some product that people would use daily etc. You also need to know which coins are worth investing to. I believe there are loads of coins that sound interesting but are actually worth nothing. In addition, if the value of collection is big, it is risky to keep the coins at home. My mentioned colleague is actually paying ~20EUR/month to a bank to keep his collection safe in their strongroom. I want my investment to earn money each month, not the other way around. Therefore, I would only consider to invest to coins for the fun factor – it would be nice to have some nice coins at home.
3. Collectible art, toys, cars etc. – I consider this to be the field which requires a lot of expertise and knowledge about value of things. This is very similar to collecting coins and perhaps even should be in the same category. The value of art also depends on how much other people want it. Since I am not that interested in arts, it’s a no-brainer for me to skip this investment type.
4. Cryptocurrency – one of the newest types of investment. People buy and sell various cryptocurrencies (Bitcoin, Ripple, Eterium to name a few) and turn profit by swings in price of them. I have a few friends who are really successful in this and turned profit of several thousand percent recently. For now, it is profit on paper but I believe they would be able to turn it to cash if they wanted. I think this investment type is on a really big hype at the moment and usually that means that the bubble may burst any minute. Maybe I am saying that because I am not an expert in this field and am still not sure how this investment works. Perhaps we will consider cryptocurrency the same way we are considering internet or smartphones today. At some point there were a lot of skeptics and people who understood the potential value of these fields became really successful. But again, for now this requires good market timing and skills of speculation to be successful so I am skipping this one as well.
5. Growth stocks – by this I mean stocks that are bought with hope that their price will increase in the future. Usually such stocks are not paying dividends so the only way to earn money is to sell them when they become more expensive. The problem with this kind of investment is that you need to time the market correctly. It is usually hard to determine when it’s good time to enter/exit the market. Also, usually such stocks have bigger swings than bigger and older companies. You also need to constantly monitor the market, do a lot of research to find good deals. This part would actually suit me because I love reading about stocks. However, I think most of the market (at least in U.S.) is currently overrated and I would wait for correction before looking for growth value stocks.
6. Day-Trading – I only added this one to the list because most of the people consider this as an investment. In my opinion, it’s only speculation with prices, not an investment. Usually day-traders earn money by purchasing rights to buy/sell stocks with some leverage. This is extremely high-risk-high reward approach and all the people I know who were doing day-trading burned their deposits at some point. I think it’s really hard to outperform traders who are working in big institutions, are using expensive tools and algorithms, who are doing it for a living full-time. If I am not mistaken, only around 10% of traders are actually profitable. I was thinking about playing with this at some point but decided that the percentage of winning is too low in the long run. Most of the people who get into trading with leverage are tempted by big reward in short period of time. Unfortunately, this happens to only really talented/lucky people in most cases.
7. Index investing – I am referring to investment to mutual funds (ETFs) that are investing to all stocks within a certain market. This is probably the best option for small investors or people who don’t want to put a lot of effort and research to stocks market. Commissions and initial investment sums are usually very low, which makes it perfect for small investors. According to statistics, it’s really hard to outperform the market in the long run. So it makes perfect sense to invest to such mutual funds. However, there is one thing which I don’t like – it is extremely BORING. I know, usually dividend investors like “boring” but for me investment is also like a game and I love the process of picking stocks, evaluating them, thinking about what would make sense in the future etc. So I would keep part of my funds in a mutual funds but I also like to have more control on my investments.
8. Peer-to-Peer lending – this is one of the newer forms of investment in Lithuania. There are a few FinTech companies available that enable you to lend money to other people through their platform. The one I am using allows investing from 5 to 500 EUR to each loan collectively. Annual yield is quite impressive (10% to ~40%) depending on risk of lender to default. Of course, higher the yield – higher the risk to lose the investment. You may also invest with insurance and fixed 10% annual interest. I like this feature but it looks like it might not be there for long because other peer-to-peer lenders are already abandoning this function. I have some money invested to such loans already due to it’s simplicity and high yield. So far, all loans are paid in time (I only started 5 months ago) but I believe that there would be some problems if economy turned south. Also, the regulations of central bank might change and I am not sure what would happen if the company which is hosting the platform would go bust. Therefore, I am planning to keep only up to 10% of my funds in this platform.
9. Finally, dividend growth stocks – this is my favorite type of investment at the moment. I think this sort of investment suits me best because of multiple reasons. I love analyzing stocks to pick additions to my portfolio and you require to do that with this approach. What I love even more is receiving paychecks of dividends to my investment account every single month (most of the US companies pay their dividend every quarter). Another thing that I love is the fact that most of the companies I invest to are raising their dividends every year. This way, my investments may keep up with inflation. Dividend stocks are categorized to Dividend Achievers (raising dividends for the last 10+ years), Dividend Aristocrats (25+ years), Dividend Kings (companies that raised their dividend for 50+ years in a row!). Usually these companies also perform better during financial crisis. Such stocks are letting me sleep well at night because I don’t need to worry too much about their value. They will still pay me growing dividends if nothing extraordinary happens. This is exactly what I will need when I decide to retire – a steady inflow of cash to cover my costs. It doesn’t mean that I don’t consider the value of stocks and just pick up any Dividend King/Aristocrat. I usually buy stocks of companies that are beaten down at the moment but where I can still see value in the future. So far, this approach worked for me and I can see that it works for other investors in dividend investors community. I guess, I will write a separate post to elaborate even more why I love dividend paying stocks with some examples in the future.

I only covered a few investment types that I am familiar with. There are so many options of investments that we cannot keep track of all of them. I think it’s important to find an approach that suits you best. Let me know if you have some comments and if I missed an investment type that you prefer.

Thanks for reading!