High Dividend Stocks

[Julio Riddols]

This board seems to have a solid contingent of individuals who have a background in investing and I wanted to ask around as I continue to research ways to make my money work for me. I don't know why I was never taught about investing or never knew how effective it could be, but I have been looking at high dividend stocks and wanted to ask a few questions to make sure I understand what I am learning about them to the fullest.

The plan I have is to take roughly $5000 every year from our tax return and put it into one of these, with the theory that we can take the earned dividend, add that to the 5000 we invest every year, and continue investing until we are eventually able to live off the dividend. I know prices fluctuate, but what I am seeing on sites like Dividend.com is that there are many of these that have steady dividends either quarterly or monthly and a low enough share price that one could build quite a bit of wealth over time by doing what I detailed above. I know it is good to diversify too, so we would likely invest in several different stocks and re-evaluate every year before reinvesting.

1: Am I off base in my idea above? Is that a legit strategy to build long term wealth? The goal would be to roll it over year after year for 15-20 years along with an additional 5000 dollar investment each year to continue building our dividend as high as it can go.

2: These stocks seem very safe, as many of them have been providing steady dividends for a decade or more. Any reason I should be more cautious?

3: I know there will be taxes involved with the earned dividends, but my assumption is that the tax rate would be lower than the tax rate on my income. Is this correct? I'm not sure what kind of capital gains this might fall under.

4: Assuming this is a sound investment strategy, any recommendations as to which particular high yield dividend stocks I should go with? I have my eye on a few but I have just started researching this stuff so I am nowhere near knowledgeable enough yet to feel like I can smartly pick one out of the group.

5: Any other investment pointers would be welcome. We know we can put together 5k a year to invest with if we continue to live within our means and do everything as smartly as possible. Are there any better ways to safely work toward retirement? I figure if it was this easy everyone would be doing it, but I've read that a reason many more wealthy investors don't do long term strategies like this is because they are looking for bigger gains on a shorter term. For a person like me this rolling investment idea seems like a no brainer. Is it too good to be true?

Thanks in advance. I wish this was something that was taught as a prerequisite in high school. Kids should have to learn about investing for at least a year or two in my opinion. I don't recall ever having a class or even a conversation with anyone about it before.

[RainMaker]

If you're looking for high dividend stocks, I'd recommend a fund that focuses on it instead of picking and choosing yourself. Limits the risk of one stock dragging down your portfolio. Vanguard has one with a low expense ratio.

https://personal.vanguard.com/us/fun...FundIntExt=INT

All I can say with picking dividend stocks is not to be taken by the higher rates. Most times the higher they are, the higher the risk is. A stock paying a yield of 10% looks nice but it usually means the company is struggling or their stock is at a low point (usually for a reason). If things continue to go sour they can cut dividends and then you're stuck with a stock that performed poorly for a couple years and are eating a loss.

If this is about retirement, I'd recommend funds catered to the year you're going to retire. For instance I plan to retire in 2045 so a large chunk of my retirement goes into this.

https://personal.vanguard.com/us/fun...FundIntExt=INT

It's an incredibly diverse mix of index funds. As you get closer to your retirement date, the fund will move investments from riskier long term ones (stocks) to safer short term ones (bonds).

And if this is for retirement, you can put all or a portion of the $5000 into a Roth IRA. The beauty of a Roth is that all the money you make over the years is tax free as long as you don't pull it out till you're 65 or older. You can however pull the principal out penalty-free at any time.

I'm a big fan of John Bogle's investment approach. His books can help you out a lot.

[Logan]

How old are you?

Investing in solid dividend-paying stocks is a great strategy. Trying to "live off" dividends only is a very different challenge, assuming you mean that literally.

[Julio Riddols]

I'm 36 now.

I've looked into the Vanguard funds, and I think that they are my primary option at the moment to start with. I hope to diversify further as I gain traction with them. I think I'll check out that book and continue to try and gain as much knowledge as possible before I make my initial investments next year around tax time. I'm going to try and develop my strategy before that and have a plan I believe in, then stick with it.

Some of this is for retirement, but I would also like to develop some level of supplemental income that could be used toward something like paying a mortgage or other future major purchases.

[CU Tiger]

Originally Posted by Julio Riddols

I'm 36 now.

I've looked into the Vanguard funds, and I think that they are my primary option at the moment to start with. I hope to diversify further as I gain traction with them. I think I'll check out that book and continue to try and gain as much knowledge as possible before I make my initial investments next year around tax time. I'm going to try and develop my strategy before that and have a plan I believe in, then stick with it.

Some of this is for retirement, but I would also like to develop some level of supplemental income that could be used toward something like paying a mortgage or other future major purchases.

I think there are a few splintered discussion at play here all kind of mixed together.

1- If you are getting a $5,000 tax "refund" you already have a built $420/month surplus to add to a mortgage fund or save for other major purchases. I cant stress this enough, you cant out smart bad habits. If you are of the opinion that you dont adjust your taxes because you arent disciplined enough and will waste the money elsewhere, fix that. Else it wont matter. You will just end up wasting the dividend "income" elsewhere

2- Drip accounts are what you are talking about. I dont do much stock investing at all. (We can have a whole other thread about that; I wont de-rail this one) but the (small) portion of my portfolio that I ever count on needing or wanting is in drip accounts. I have 10 companies I invest in and continually (meaning whenever I think about it, a few times a year) rebalance to keep them equal. These are my 10, I can explain why for each. But just a starting point for you.
1- JNJ
2- XOM
3- MMM
4- KO
5- PG
6- HRL
7 -PEP
8- ABT
9- NEE
10- UNP

All 10 perform well and have long track records and they diversify me quite a bit. They are also recession resistant companies.

3- Planning to live off dividends, or even siphon off funds is a questionable strategy.

[Umbrella]

Dividend reinvestment is solid, but it does have its drawbacks. The advantage of that is that you are inherently buying more when the stock is low, and less when the stock is high, which is really nice.

There are a few down sides though. The biggest is a lack of diversification, unless you want to do this with many different stocks. The other problem is with your record keeping. In this day and age with everything digital, it is much easier, but back in the day it was a chore keeping track of all the buy prices for every reinvestment. You'll need these for tax reasons.

Speaking of taxes, dividends may or may not be taxed at a lower rate than ordinary income. I think based on your tax documents, it can be determined, but thinking about this more than once a year is not something I like to do, so I would suggest talking to an accountant to learn more.

Finally, if you think you will ever just live off of dividend income, I think you are being a bit naive. Based on my experience, the value of the actual stock is way higher than the dividends you receive. Think of it this way. I think a stock returning 10% dividends would be considered high dividend. If you are receiving $100K a year in dividends, that means you have $1M in stock. And as others have mentioned, these stocks are usually high dividends because they are very risky. Having that much tied up in risky stocks would scare me, especially if my plan was to live off of the income.

My advice, which is worth what you pay for, is to stay diversified, and once you get your portfolio built up, think of the dividends as a nice bonus check. For example, right now I am earning about $12K/year in dividend income. This is after around 20 years of diligent investing. Or better advice would be to talk to a financial adviser. A lot of times people think that only rich people use them, but you can find a lot of advisers, especially younger ones just starting out, that are willing to work with clients that are just starting to invest. Then together you can work out a plan based on your age/risk tolerance/income/goals that works best for you.

[Julio Riddols]

Our credit union has investment advisers I believe, and they are not paid commission so I do plan to speak with them about this stuff too before I dive in. I really appreciate the info I'm getting here- I kinda expected that I was being too optimistic about the potential of just investing in these high yield stocks, whether they were diversified or not.

CU - About the tax return thing - We get most of that 5k essentially as a child tax credit at tax time.. Are you saying I need to change my claiming allowance on my tax forms or that I should consider those funds as something I can use to help pay a mortgage? Want to make sure I understand fully what you're saying there.

I've also been playing Investopedia's stock simulation game, which I think will teach me a ton about patience and how to read the market and what to look for in a stock purchase if I decide to go that route at some point. From what I have been reading, finding a stable company at a good buy in point is one of the keys to ensuring quality returns. I've been toying with short selling and basic buys in my first few days on there, but eventually want to toy around with other types of buys.

Please keep the info and opinions coming though, the more information I can get the more I can educate myself, and I find that speaking with peers who have experience is one of the best ways to gain a deeper knowledge of something. I can have an academic knowledge of something all day, but I want to siphon a little bit in the form of experience to help illustrate those techniques in my head.

[QuikSand]

Non-technical discussion to follow:

Here's a way to think about dividends that I think is helpful.

Everyone knows the idea of a Lemonade Stand game, right? You start out small, you have success selling lemonade, and then you buy a second stand, and a third, and then you diversify into fruit punch or shaved ice, and so on and so forth. The whole idea is that your successes breed further successes.

Now, if you invest in a company that regularly distributes its profits, or a sizable share of them, to shareholders as dividends...what is the downside of that? Well, as an investor, it's nice to have the cash in hand, sure. But the point is -- that's the money that you'd otherwise be using to buy the second lemonade stand. If the business is profitable, because it's innovative or efficient or creative or whatever, then siphoning away its resources to send back to investors (so they can either buy more shares, or just pocket the cash right away) is not the ideal use of those resources if the business has growth potential.

So...all thing equal (where they rarely are, of course), that's the rub with dividend stocks. By taking money off the top, you inherently undermine the growth potential. That means some degree of stability (in some cases), but you don't expect to see the same sort of appreciation potential that other stocks unburdened by heavy dividends would yield.

So, that's why you tend to see lots of utilities offering good yields. The conventional regulated utility has a fairly defined service area, fairly limited growth potential, generally stable profits, and is a perfect candidate to simple ship a chunk of said profits back to shareholders. Stable, predictable, and little downside to cutting off growth options.

But, what about an energy company? What if they are good at drilling for oil, or whatever they do like that? Do you want that money in your pocket, or do you want that money out there making good bets on the next shale deposit to tap?

So...I think that's a good way to think about dividend stocks. I have some in my portfolio, and it's tempting to think it's just free money. There's an offsetting perspective involved that you shouldn't deny. If you're looking for long term stability... the potential trade off might be that your invested assets appreciate 4% per year rather than 6% per year, and your dividends end up just being cash advances against your eventual nest egg.

[Logan]

Your best bet really is to just go the Vanguard etc passive index fund route. Just focus on funds with the lowest expense ratios possible. You should find plenty under 0.20% and once you have more money to invest, can get that down under even 5 bps. Those fees are dollars you will never get back and can seriously add up over the years.

When you become more knowledgeable about all this stuff (not intended as a slight at all) then maybe you start putting a small percentage of your portfolio (10%) into individual stocks that you like. You may even have exposure to some of these in your funds which is okay as long as you're broadly diversified.

[Logan]

I've been toying with short selling and basic buys in my first few days on there, but eventually want to toy around with other types of buys

I missed this the first time around. Please don't do this. It's really all gambling, even for people who know a lot about what they're doing.

[Julio Riddols]

Originally Posted by Logan

I missed this the first time around. Please don't do this. It's really all gambling, even for people who know a lot about what they're doing.

Yeah, I wouldn't do this unless I had a lot of money to throw around.. Like millions. It's fun in a fantasy setting where I can't lose actual money though. I'm glad a thing like this exists where I can play around with stupid ideas with no repercussions.

[Julio Riddols]

I think you guys have given me a lot of good info, I'll certainly bank it and use it going forward. By tax time next year I hope to be fairly knowledgeable regarding what my goals and path to those goals will be by then so I can discuss it with my advisor without sounding like I have no idea what I'm getting into.

Again, I really appreciate it. I'm gonna find a way out of the 9 to 5 whether I have to eat rice every day for the rest of my life or not. Don't want to be doing front desk work in my 70's.

[Edward64]

My portfolio has a good % in 2 dividend funds - VDIGX and SCHD. They focus on quality and companies "growing" their dividend payout vs just highest payout.

[Edward64]

Originally Posted by Julio Riddols

... I have to eat rice every day for the rest of my life or not. Don't want to be doing front desk work in my 70's.

Dave Ramsey would say "rice and beans"!

I think the biggest thing you can do is understand your expenses, set a goal of $x, and keep plugging.

FWIW, about 4 years ago I realized I did not have much liquidity/cash. Most of my $ were in the retirement accounts and so not that easily accessible. I got an eTrade account and started putting more savings into it so I can retire before 66+