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dividend investing strategy for wealthUp to this point the idea is pretty simple.  Find fairly large stocks that are currently low, but that also appear to have a trend that will push their value upward.  If they go down, buy more.  It’s really that simple, but the truth is that it only works effectively when you are investing regularly, say monthly, even if it is just $100.  Like I mentioned earlier, let’s say that’s all you can afford, so over about a year you invest in one low stock each month until you have about 12 of them.  Then each month following, you re-invest your $100 in whichever one has dropped the most (assuming there are any, otherwise you may consider adding another new one).  Over time (the longer the better), you’ll make a bundle whether you invest $100 a month or $10,000.  However, sometimes a dividend investing strategy makes more sense.

I Don’t Want to Retire at 59½!

What about an account that for some reason, you don’t invest in very often?  For example I am only 41 and fully expect to retire by age 50. The problem is, that’s 9½  years before I can even touch my retirement accounts (401k, IRA, Roth IRA, etc.) without huge IRS penalties.  Thus, most of the money I invest is into my individual account.  I can put money in and take money out whenever I want, much like a bank account, and while I pay taxes on my gains, there is no restriction on when I can use it.

Now retirement accounts are great because they offer a tax shelter, but you can’t withdrawal any money until you are 59½ or the IRS gets an extra big chunk of it.  For example, a 401k, 403b, SEP and IRA are funded from your paycheck before taxes are taken out and are not taxed until you start withdrawing money.   A Roth 401k and Roth IRA are funded from money you have already paid tax on and can never be taxed again, no matter how big it grows.  These are great options for anyone that does not plan on retiring until at least the magic age of 59½.

Don’t JUST Invest in Retirement Accounts

If you are at least 50 and not close to retiring, you should max out all of your retirement account options first.  But if you are younger, and want to retire early, your nest egg will need to mostly be in non-retirement investments.  One note however, if your company does any sort of matching in your retirement account, you should invest whatever they will match simply because it is an automatic 100% return on your money, no matter when you plan to retire. So, if they match up to 5% of your income, then elect to invest 5% of your income.

So, investing in only retirement accounts means I can’t retire when I want to and have the money to do it.  However, I still have some money in retirement accounts because I get a tax break for doing so.  Each year when I meet with my accountant to do my taxes, he determines the best option for me and I usually end up investing a few thousand dollars in one of my (or my wife’s) retirement accounts.  So, any one account is only added to every year or two, sometimes three!  So, how in the world do I cut my losses this way?

Cut Your Losses With This Dividend Investing Strategy

The fact is you cannot effectively do so.  For instance, let’s say that I have stock in my Roth that is down 50% from the first time I bought it, but of course, I am convinced that given a few years, especially with cutting my losses, it will make me a handsome return.  However, I may not put more money into it for another 3 years.  By then, it may be back to what I bought at, or even in the black.  Thus, I would have missed out on a huge loss cutting opportunity and a lot of profit upside.  It would seem that everything I have taught you thus far, won’t work in this case!

Actually, it does, but with a twist.  A better approach is to invest in good quality dividend-paying stocks.  Ones that are low at the moment are even better, but honestly being low is not the part that matter.  Far more important than being low, they should be high-quality, large companies that have consistently paid dividends for many years.  I know, this sounds almost opposite to what I have taught you with buy-low-sell-high, but remember, we’re assuming that we only fund this account with extra money occasionally, so bear with me.  It will all make sense, I promise!

Here’s How To Do It

Now let’s say that you’ve invest $20,000 in your Roth over the years.  You identify 10 good dividend stocks and buy about $2,000 of each.  Assuming they all pay about 5% per year, you’d earn roughly $250 per quarter.  If their value went up, so would your dividend and vice-versa.  But the real point here is that your stocks would be generating a significant enough income, that you would have regular cash to cut your losses with.  So, each quarter, you identify the stock that has dropped the most, or even the one that has gained the least (if they have all gone up from your initial buy price).  This allows you to more effectively cut your losses than if you could only do so every year or two.  This is the essence of this dividend investing strategy.

The “Normal Dollar-Cost-Averaging Approach

Let’s look at a theoretical scenario as it usually happens, not using the dividend investing strategy I have outlined.  Instead we reinvest dividends in the stocks that produce them.  In other words, when stock A produces say $10 in dividends, that $10 is re-invested in stock A, no matter what the price.  Let us assume the scenario above and also assume that the value of each stock does not change, just to keep the math easy to follow.  Here is what things look like after the 1st quarter:

Stock  Value Dividend  Return/Quarter
A  $    2,000.00 5%  $                25.00
B  $    2,000.00 5%  $                25.00
C  $    2,000.00 5%  $                25.00
D  $    2,000.00 5%  $                25.00
E  $    2,000.00 5%  $                25.00
F  $    2,000.00 5%  $                25.00
G  $    2,000.00 5%  $                25.00
H  $    2,000.00 5%  $                25.00
I  $    2,000.00 5%  $                25.00
J  $    2,000.00 5%  $                25.00
Total  $  20,000.00  $              250.00

Now we’ll simply take the dividends and invest them in each stock, again making the same assumptions, but this time let’s assume that stock J drops by 10% as well.  Now we have this after the 2nd quarter:

Stock  Value Dividend  Return/quarter
A  $    2,025.00 5%  $                25.31
B  $    2,025.00 5%  $                25.31
C  $    2,025.00 5%  $                25.31
D  $    2,025.00 5%  $                25.31
E  $    2,025.00 5%  $                25.31
F  $    2,025.00 5%  $                25.31
G  $    2,025.00 5%  $                25.31
H  $    2,025.00 5%  $                25.31
I  $    2,025.00 5%  $                25.31
J  $    1,825.00 5%  $                22.81
Total  $  20,050.00  $              250.63

Our value has increased by $50, plus we have a $250.63 dividend.  As before, let us assume that dividends are distributed to each stock that created them to get the 3rd quarter, but this time stock J returns to its original value:

Stock  Value Dividend Return/quarter
A  $    2,050.31 5%  $                25.63
B  $    2,050.31 5%  $                25.63
C  $    2,050.31 5%  $                25.63
D  $    2,050.31 5%  $                25.63
E  $    2,050.31 5%  $                25.63
F  $    2,050.31 5%  $                25.63
G  $    2,050.31 5%  $                25.63
H  $    2,050.31 5%  $                25.63
I  $    2,050.31 5%  $                25.63
J  $    2,047.81 5%  $                25.60
Total  $  20,500.60  $              256.26

Now the stocks are worth an extra $500.60 plus a dividend of $256.  Let’s do it one more time to get to a full year.  This is our total:

Stock  Value Dividend  Return/quarter
A  $    2,075.94 5%  $                25.95
B  $    2,075.94 5%  $                25.95
C  $    2,075.94 5%  $                25.95
D  $    2,075.94 5%  $                25.95
E  $    2,075.94 5%  $                25.95
F  $    2,075.94 5%  $                25.95
G  $    2,075.94 5%  $                25.95
H  $    2,075.94 5%  $                25.95
I  $    2,075.94 5%  $                25.95
J  $    2,073.41 5%  $                25.92
Total  $  20,756.87  $              259.46

After one year, the account is worth a total of $21,016.33.  This is an increase of 5.08%.  But I told you that you’d be better off investing in the stock/stocks that have dropped because when they return, you would effectively being cutting your losses and setting yourself up to make more when the value goes back up.  So, let’s compare the two.

Dollar-Cost-Averaging vs. the Dividend Investing Strategy

We’ll use the exact same scenario, the only difference being that we’ll invest everything in the stock that goes down as prescribed by our dividend investing strategy.  This is what you would have after 1 quarter, the same as in the previous scenario:

Stock  Value Dividend  Return/quarter
A  $    2,000.00 5%  $                25.00
B  $    2,000.00 5%  $                25.00
C  $    2,000.00 5%  $                25.00
D  $    2,000.00 5%  $                25.00
E  $    2,000.00 5%  $                25.00
F  $    2,000.00 5%  $                25.00
G  $    2,000.00 5%  $                25.00
H  $    2,000.00 5%  $                25.00
I  $    2,000.00 5%  $                25.00
J  $    2,000.00 5%  $                25.00
Total  $  20,000.00  $              250.00

As before, assume that all the stock values stayed the same for the quarter, except for J, which again drops by 10% to $1800, thus decreasing the dividend by 10% also.  Plus, we added the $250 in dividends to that same stock (J).  This is what we’d see after the 2nd quarter:

Stock  Value Dividend  Return/quarter
A  $    2,000.00 5%  $                25.00
B  $    2,000.00 5%  $                25.00
C  $    2,000.00 5%  $                25.00
D  $    2,000.00 5%  $                25.00
E  $    2,000.00 5%  $                25.00
F  $    2,000.00 5%  $                25.00
G  $    2,000.00 5%  $                25.00
H  $    2,000.00 5%  $                25.00
I  $    2,000.00 5%  $                25.00
J  $    2,050.00 5%  $                25.63
Total  $  20,050.00  $              250.63

You’ll notice that all the values are the same as in the previous scenario at this point, but this is where they will start to differ.  Again, assume that values of the underlying stocks do not even change (remember, they could and some will go up, only increasing your dividend) and the value of J returns to its former glory.  Here’s what we’ll have after quarter 3:

Stock  Value Dividend  Return/quarter
A  $    2,000.00 5%  $                25.00
B  $    2,000.00 5%  $                25.00
C  $    2,000.00 5%  $                25.00
D  $    2,000.00 5%  $                25.00
E  $    2,000.00 5%  $                25.00
F  $    2,000.00 5%  $                25.00
G  $    2,000.00 5%  $                25.00
H  $    2,000.00 5%  $                25.00
I  $    2,000.00 5%  $                25.00
J  $    2,554.39 5%  $                31.93
Total  $  20,554.39  $              256.93

One more time, so that we have a whole year.  And by the way, since all stocks are their original values, it really doesn’t even matter how we distribute the dividends, but just for consistency, we’ll again add them all to J:

Stock  Value Dividend  Return/quarter
A  $    2,000.00 5%  $                25.00
B  $    2,000.00 5%  $                25.00
C  $    2,000.00 5%  $                25.00
D  $    2,000.00 5%  $                25.00
E  $    2,000.00 5%  $                25.00
F  $    2,000.00 5%  $                25.00
G  $    2,000.00 5%  $                25.00
H  $    2,000.00 5%  $                25.00
I  $    2,000.00 5%  $                25.00
J  $    2,811.32 5%  $                35.14
Total  $  20,811.32  $              260.14

This time of course the dividend increased with the higher stock price, but remember, the value of all of the stocks is only what it started out as.  None have even gone up from their original buy price at this point.  Yet the account value is $21,071.46.  This is an increase of 5.36%

Compared to the 5.08% achieved in the first scenario, this may not seem very significant, but it is actually 5.5% more money.  imagine this small increase compounded over the course of years, perhaps decades.  In fact, given about 15 years, you’d have roughly twice as much return with Scenario B than Scenario A.

A Short Review of Our Dividend Investing Strategy

So, let’s recap what we’ve learned.  Buy-low-sell-high with cutting losses is the way to go when it comes to investing in accounts that you can fund on a regular basis.  However, in retirement accounts that you may only invest in on a yearly or less basis, use the dividend investing strategy I have outlined.  Find quality dividend stocks, but don’t reinvest dividends.  Instead, take all the dividends each time you receive them and buy stock in whatever company is the lowest.  While you may not have followed the math entirely, recall that in scenario B, we made 5½% more money, but the only difference was how we reinvested the dividends.

List of High Dividend Stocks You Might Consider

Symbol Company Name Dividend Dividend Yield
SIX Six Flags Entertainment Corp $0.83 7.77%
UVV Universal Corp $0.76 5.80%
UG United-Guardian Inc. $0.55 5.54%
CM Canadian Imperial Bank of Commerce $1.44 5.05%
BCE BCE Inc. $0.79 4.98%
IBM International Business Machines Corp $1.62 4.90%
BNS The Bank of Nova Scotia $0.90 4.87%
APO Apollo Global Management Inc $0.50 4.72%
TU TELUS Corp $0.58 4.67%
LYB LyondellBasell Industries NV $1.05 4.58%
TRP TC Energy Corp $0.75 4.49%
D Dominion Energy Inc $0.92 4.48%
IP International Paper Co $0.51 4.45%
BMO Bank of Montreal $1.03 4.29%
PFG Principal Financial Group Inc. $0.55 4.20%
RY Royal Bank of Canada $1.05 3.98%
WASH Washington Trust Bancorp Inc $0.51 3.93%
TD Toronto-Dominion Bank (The) $0.74 3.90%
WFC Wells Fargo & Co $0.51 3.88%
SLF Sun Life Financial Inc $0.55 3.75%
SAFT Safety Insurance Group Inc $0.90 3.73%
PNW Pinnacle West Capital Corp $0.78 3.64%
WHR Whirlpool Corp $1.20 3.41%
CBRL Cracker Barrel Old Country Store Inc $1.30 3.38%
NKSH National Bankshares Inc $0.72 3.35%