🧑🏻👩🏼 Why do so many young people rely on a dividend strategy? 🤔
An attempt at an explanation
Hi guys,
you know, if the post starts with "Hi guys", it might get a bit longer again 😬. This time it's not supposed to be about numbers, but once again I want to address the topic of Dividend strategy dedicate.
Initial situation
A portfolio feedback is shared on the platform and once again the desire for monthly cash flow is expressed, by a 20-year-old. This happens about once a day. [1]
Why are young people in particular, when they start investing, focused on a dividend strategy?
What drives them to focus on monthly cash flow today, when their savings phase until retirement is well over 40 years?
Why, for example, is a dividend strategy so uninteresting for me and why is it so difficult to convince one from the other?
I wanted to get to the bottom of these questions, and along the way it didn't just happen once with me. click once.
In a comment I once wrote that we were having a good discussion about dividends, but that we had not yet reached the end of it. The end would look like everyone accepting each other's strategy wordlessly, perhaps after a few queries. Since we are not here yet, because at the moment everyone / every 20 year old is tried to talk the dividend strategy out again, we are still in the middle of it.
And with this article I want to get one step closer to the goal and give some possible reasons why we invest the way we do. The whole thing is based on my own observation, discussion here on getquin and some research on the internet. Finally, here are some tips from a 33-year-old to those almost half his age.
Props go out to the @DividendenWaschbaerwho was instrumental in gaining the knowledge.
Let's get started.
The order of money - from the point of view of a man in his early 30s
If you want to understand why we invest the way we do, it's best to start by asking yourself.
Why doesn't a dividend strategy suit me and why does my portfolio look the way it does?
The answer lies, among other things, in how old I was when I started investing, what career path I've been on, what other life milestones I've already reached, and what I expect from the rest of my life. The explanation is still pretty fuzzy, so let's get a little more specific.
With my year of birth in 1990, I belong to Generation Y, just like everyone born between 1981 and 1995. I grew up with the Internet and technological change, globalization and the first cell phones, later smartphones. You could say I know all the technology and can acquire to learn it at any time, but I know it from infancy and initially shy away from increasingly present and noisy content.
What do I mean by that?
In my early and mid-20s, my thoughts might have sounded something like this:
YoutubeSure, we all know it, but making videos in front of a camera is something others should do.
Instagram: These are just pictures and I can also share them on Facebook.
TikTok: 15 second clips? Who needs that when Youtube gives me much more information.
As a reminder, we are roughly a 25 year old in 2015.
In my adolescence 10 years before, I was not looking to spend my time fully on the internet, apart from numerous online games, teen forums, and ICQ chats.
Internet for sharing: Yes!
Internet for further education, watching TV, listening to music, pure pastime, exclusive shopping: Not yet!
At the beginning of my 20s I was about to start my career anyway. From school, to university, to the first job, to the second job.
If one undertook a journey or a Work&Travel after the Abitur, that was rather the exception. Because if you believe your parents, the serious side of life begins now, the reason you went to school, the reason you studied: To earn good money someday and be able to afford something.
Of course, we get a lot of our way of thinking from our parents' home, but I think we're still the ones who put a lot of emphasis on what our parents exemplified. We open a checking account at the same bank, when we vote for our first political election, we vote for the party our parents vote for, when we have financial questions, we ask our parents first. And they usually send us to the bank advisor.
What alternative do we have?
We didn't know at the start of our careers that there is no set path and that it's okay to shake up fixed structures from time to time.
The first job brought the first money into the bank account, which doesn't take long to become more than you can spend. We, i.e. Generation Y, do not know any interest on the money we have earned ourselves, and although we know that we have to make private provisions, we lack alternatives. We can choose from a pool of branch bank funds, Riester pensions and building society savings contracts, but for all the positive things the bank advisor can tell us about them, we only hear and read negative things ourselves.
If we do not become aware of the capital market through relatives or acquaintances, we have to become aware of it ourselves.
Until I but 2019 on the first and 2021 on the decisive videos and podcasts of Finanztip have come across, I already had my
order of money set.
I go to work and earn my monthly salary. From this salary, savings are made in the daily allowance account. The salary is used to rent the first small apartment, plan the first small vacation with the girlfriend and buy the first used car. As the salary increases, the apartment becomes larger, the vacation more expensive, the car more comfortable. The salary is the limiting factor.
The salary has to be used for running costs, larger expenses require longer savings phases. But that's okay, in order to be able to afford a lot, we have to go to work. That has always been the case.
The order of money from the employer to the checking account, to the savings account only starts a last further way when we learn late in our 20s through Youtube that we can also provide for ourselves with ETFs. A large part of the money that used to go into a savings account now goes into a securities account. And that's where it should stay.
The custody account is becoming the mental depository for all the money that we no longer need until retirement. We have adjusted our living situation to our salary to the extent that we can cover all running costs and the rest gives us enough freedom to go on vacation and plan for the future.
Put simply, I just don't need more money each month! Anything I have too much of today, I put into deposit anyway. So aiming for more money per month makes no sense to me, someone who is starting to invest after 8 years of professional experience, makes no sense at all.
If I need to replenish my savings account after a large expense, the monthly savings rate into the deposit is simply reduced or suspended. If necessary, several times in a row.
We started out in our first job with the intention of carrying it, or a similar one, through to retirement. It is only through investing that the idea of reducing working hours in retirement opens up. But this is not our primary goal. We feel a certain responsibility to work until retirement, and the reason again is: Because it has always been that way.
The fact that with this construct and the order of order of money we have to learn from younger people.
Who are the young people of today?
Learning from the younger ones. As a 30-year-old, that sounds harder than it might seem; do we actually still think of ourselves as "the young ones" and what can I learn from someone who has less life experience than I already have?
How I have learned, especially through getquin: a lot.
Everyone born after 1995, but especially after 2000, has grown up with the iPhone. Constant accessibility, permanent online presence, social networks and a flood of information through growing and ever louder content. The analog world is increasingly shifting to the Internet. There plays, I correct streaming, for Generation Z, as it is now called, the music is literally playing.
When the video "What is the MSCI World Index?" by Finanzfluss appeared in 2016, a Y-er was 26 years old, in the middle of his working life, a Z-er 18, just before graduating from high school. Generation Z has its first personal contact with the topic of investing at a much earlier age, in many cases even before it has its first fully paid job, if you add education and, if applicable, university studies to the equation.
Before we go into how this circumstance influences investing, we need to briefly find out what continues to distinguish the young career starters from their predecessor generation, especially in their view of the future, the job and private life.
The latter two in particular should ideally be kept strictly separate. This is also reflected in planning for the future. Once the possibilities of the money invested have been explored, the desire to reduce working hours in the future is quickly expressed, without one or the other perhaps ever having been employed. Just dreaming about financial freedom today and working toward it didn't happen in my generation, especially with this frequency.
Above all, Gen-Z wants security. Security in a world full of uncertainties. They want to be non-committal, mainly with their job. Although job security and the desire for consolidated structures are at the forefront of their career choices, strong loyalty to the employer does not prevail. Accordingly, in times of a shortage of skilled workers, this means that companies are not only courting new, rare employees, but also the existing ones.
Once Generation Z is on board, it must be given reasons not to simply jump overboard again. Feedback and motivation are important tools in this regard, and for the "digital natives" they are immediately should take place. They are used to it no differently through likes, comments and reactions from the social networks.
Immediate confirmation of their work. This is the bridge to a new definition of the order of money.
The order of money - from the point of view of a 20-year-old
So we put ourselves in the shoes of a high school graduate, college student, young professional, or anything in between. That's where Z-ers are in these years. Being constantly online, it's only a matter of time before we start thinking about investing our money in the capital markets.
Anyway, putting thoughts into action is just a few clicks and a few minutes of web identification away. Online, of course, for little money. Thanks to Neobroker.
So we may have arrived at the job, received our first salary and already know that we don't want to continue this way for the rest of our lives. Our salary does not allow us to make big jumps yet. We can cover running costs, but long vacations and a big apartment, we can only dream of that for now.
But we want to be free and independent. The decision-making power, about every what, how, where and when should only be ours. So what influence can I already exert today, which foundation stones can I lay and which of them can I even get rolling?
Most attentive readers of this great platform already know the answer, it is the.... Drumroll....
monthly cash flow, which opens every door to the desired goal.
Financial freedom? Check!
Financial security? Check!
Immediate motivation? Check!
Foreseeable independence? Check!
While the Millennial's securities account has been declared a mental repository, it is becoming a second source of income for the digital native. This changes the order of moneywhich is no longer a line with a start and finish, but a cycle. Investing is not just for old-age provision, but the advantage of the extremely long savings phase and the very strong compound interest effect is exploited in order to have something from the securities account not only at the end of the savings phase, but already during the same.
For me, these are the reasons why many young people choose the dividend strategy for themselves.
That's pretty obvious, isn't it?
For the sake of completeness, this view doesn't know black and white either. None of the above is set in stone like that, and in how we invest, no matter how old we are, there's a lot of gray in there too. Dividend strategies have always been followed.
What risks do I personally see in a dividend strategy at a young age?
That leaves one last chapter that I really want to get off my chest and that perhaps anyone who is a new investor in their early 20s who favors high dividend stocks should read at least once.
It's about risks associated with a dividend strategy at a young age.
There is still a widespread consensus that dividends are more for those who don't have much time left until retirement. Everyone else should rather focus on growth, especially the long investment period lets fluctuations sit out and be endured very well. I was one of them myself until a few days ago.
But I am no longer so sure.
Especially when I am young, 35, 40, 45 years long profit from compound interest, could the same not even benefit me so much that I can afford not only to withdraw for 30 years during retirement, but to drive a mix of consumption, reinvestment, strong and weak savings phases, and this over a much longer period, bpsw. already from my 50s or even earlier?
I think you quickly realize that the already not very simple calculation after the pension gap, the necessary savings amount and the resulting monthly savings amount becomes far more complex, if you add annually increasing variables to the calculation, which vary in amount each month, but where it is not even clear whether these are added to the calculation or not, because I do not know whether I reinvest the dividends or not.
And here lies the first danger I see. The real goal is lost sight of. Closing the pension gap and providing for retirement.
Due to frequent back and forth during the savings phase, the initial situations change more quickly than intended. There is a lack of clarity and structure. What is needed here is a clear plan and constant monitoring. Determining the pension gap becomes indispensable, which is difficult as a beginner, since you have never received a pension notice yourself.
With the receipt of the first pension notice, it is absolutely necessary to make up for it! From the determination of the pension gap a target sum must be defined, which is to be reached with retirement. Finally, it must be ensured that this target can also be achieved, despite the withdrawal of dividends.
When drawing up such a calculation, the greatest difficulty will be not to interfere with compound interest at work. Because that is the second big risk. The first 100,000€ are the most difficult, they say. And they will become much more difficult, do not let the money work for itself. An increase of the capital is still in the foreground, no longer the maximum, but at least a steady one.
If attempts are made to increase monthly cash flow by any means possible in one's early twenties, I see the distinct danger of having too much monthly money available in one's mid-thirties. Yes, you read that right. I, in my early 30s, claim I don't need more money each month because whatever is left over ends up in the deposit account anyway. What's to say you won't feel any different after 10 years of raises and possibly two job changes? Many people before you have achieved what you are dreaming of today. The main part of your monthly cash flow is still your salary and that should be the focus, because even in your mid-30s, you will certainly continue to work full time for at least another 15 or 20 years. Sure, you might say, I'll just reinvest everything I don't need at the end of the month. But remember, the reinvestment has been cut by at least 25% by taxes and in bad cases is stuck in a low-yield dividend portfolio.
The danger I want to point out here is that the dividend strategy at a young age is thinking too short! Think about your life situation and your portfolio at 30, at 50, at 70. Not only about tomorrow's portfolio.
While we are on the subject of the risks of a dividend strategy at a young age, the disadvantage of high-dividend ETFs in combination with a long savings phase should not be overlooked. Dear @DonkeyInvestor has shown this impressively in his article [4]. Dividends grow more with a long investment horizon due to price returns, although the dividend yield may be low. Candidates like the $VHYL or the $ISPA in my opinion have no place in a portfolio of a person under 50 years of age. Dividends can't be needed that much at age 25 to give up much of your money for the rest of your life. Again, don't think too short.
Please also include growth in your portfolio when it comes to monthly cash flow. There are ETFs and a variety of individual stocks for this as well.
Finally, I highlight @Epiwho may also find a few answers to his questions in this post 😀 👋
Sources
[1] subjective feeling
[2]
https://www.ibau.de/akademie/wissenswertes/generation-x-y-z/
[3]
[4] @DonkeyInvestor - https://getqu.in/WEG4O1AECMG3/hXyoLaiuK4/
