Why I already rely on the dividend strategy at a young age

Moin,

after @Fabzy doesn't seem to get away from the dividend strategy and has now already published the second or third post about it (sorry, raccoons can't count that well) in which he tries to understand why young people go for a dividend strategy, I would like to publish my view on it. Since we are both almost the same age, I guess our start could be (and is) very similar. Yet, we both follow different strategies. The discussion about dividend strategy or growth strategy or a mix is certainly far from over and yet it is good to talk about it and get to know other perspectives. Hence my contribution today. Perhaps it will then become even clearer why I (and many others) rely on a dividend strategy, even though there is still a lot of time until retirement and returns are being missed.

First of all, I have to get something off my chest:

This is of course my personal opinion and strategy. I make no claim to correctness or perfection, nor to completeness, nor to having found the golden path. I am well aware of the possibility of missed returns. In the end, however, it is not always just about returns and about the highest possible portfolio level at time X, but also and above all about feeling good and about quality of life. @Fabzy tries to find a reason in his article why especially young investors rely on the dividend strategy, although they still have an investment period of easily 30-40 years and thus have the best conditions to take any growth. Irrespective of the fact that he admits that he is an old wizened turtle and I am a young filigree raccoon, the answer to this, as he has also noted himself (among other things), is cash flow.

Foreword

There are virtually an infinite number of variables that lead us to a strategy that is right for us. Of course, education and experience in youth are part of it. Also the possibilities to get information are part of it. A strategy should of course be fixed, but not set in stone. In life, a strategy can change. Also several times. But it should always fit the circumstances of life.

Similar to the well-known raccoon saying everyone is his own pizza baker. While some go for full growth, others prefer to take it easy and bet on supposedly safer shares, while also collecting dividends, which additionally slows down the company's growth.

But in the end, whatever feels best for you is the right thing to do.

Why did I choose the dividend strategy?

In my particular case, there are three points that make me go for a dividend strategy.

Point 1 is safety. I pretty much fell flat on my face at the beginning of investing. Typical fail, as it probably happened to several more people in the beginning, I hope. On the Internet you read about quick money and seemingly a surefire deal. A stock is mentioned, preferably a Canadian penny stock (what a penny stock is, of course, is unknown, but it doesn't matter. Canadian stock exchange, can only be safe). Briefly "researched" and found that the price has made just under 400% in 2 weeks. Many comments available, all agree (this is certainly like the reviews on HolidayCheck). Quick in before it's too late. Well and as luck would have it, that was exactly the top... stop loss? What a nonsense. Much too complicated at the beginning. Besides, this is only a short setback anyway. Well, ignorance is no excuse.

So here's an absolutely important and cautionary note: do your own research, understand the company, and don't just buy anything because it's somewhere on the Internet (including Instagram and getquin). And if you do, then at least set a stop-loss order!

By the way, the investment in question is currently at -92%.

This experience caused me to bet on rather less volatile stocks, but at least on well known names. I had burned my fingers. Of course, growth stocks are in no way comparable to Canadian penny stocks. This is just for the sake of completeness.

Point 2 is motivation. It simply motivates me when I regularly receive dividends in my account. What's more, thanks to savings plans, they increase with each month, so you can see an increase month after month and year after year. It's fun and motivating to keep going. Some don't need this motivation and continue to save even if the deposit value sinks and sinks and sinks and don't worry about it. I am glad for this motivation and needed it even more when I started and the mishap with the Canadian penny stock happened to me.

This brings me to

Point 3 and thus the core of the post:

Cash Flow.

Yes, it is cash flow (and the taxes associated with it) that diminish returns and hurt compound interest. But it's that very cash flow that brings me what I already want today. Financial freedom and additional income.

Of course, Financial Freedom can be defined very broadly and is probably also somehow different for everyone.

For me, this freedom means that I can already buy things today, from money that passively works for me.

What is the goal anyway?

At the beginning, of course, everyone must first ask themselves what their personal goal is. From this, a part of the strategy could be derived.

You could ask yourself the following questions:

• Do I want to close the pension gap?
• Do I want to retire earlier?
• When do I want to start working less or not at all?
• Am I willing to sell shares later?
• At what point do I want financial freedom?
• What does being free mean to me?
• What is needed to achieve this?

Now there are of course different calculations that can be made. How much do I have to save and for how long in order to have the following deposit balance later with this or that return. With it I can generate then depending upon whether with share sales or without share sales so and so long my payouts.

What is my goal now?

My personal goal is on the one hand to at least close the pension gap, rather to overfill it. On the other hand, I would also like to be able to enjoy financial freedom as early as possible, with less volatility than would be the case with growth companies.

I have deliberately not set myself a concrete (i.e. financial) target.

I want to get the maximum possible out of it within my framework, and what comes out extra for retirement is good. If it's even so much that I can retire at 55, then that's all the better.

Roughly speaking, my goal can be divided into the following areas:

• Reduce/close/exceed pension gap
• as little volatility as possible
• Enable a certain degree of freedom already now

So, as you can easily see, my goal is not the maximum possible return. Nor is the ostensible goal to have one or two million on target date X. My goal is simply to generate additional income for retirement while already having a second income within a volatility framework that is as small as possible.

I'm well aware that returns will fall by the wayside, but that's the way it's planned.

How do I proceed to achieve my goal?

Many ways lead to @Barstens garbage can.

As individual as the personal goal is, as individual is the way to get there. You can try to beat the market, you can buy growth stocks, ETFs (and there again umpteen different variations), dividend stocks, dividend growth stocks, or a combination of all, etc. Everybody has to find his own way. The important thing is to stay true to your strategy, but also to question and review it regularly.

I use a combination. Not just one of pizza and banana peel but of dividend growth and higher dividend yield.

There are several reasons for this:

My ETF portfolio will soon be self-sustaining. So if I have to reduce my savings rate because something unforeseen happens, I can still feed my ETF portfolio out of itself with more shares. So despite the fact that the savings rate is going away, the savings rate will continue.

Of course, this is a bit of self-deception, because with an accumulator I also reinvest the dividend, just before I get it into my account.

Nevertheless, it contributes to my well-being (psyche is also an important factor for a raccoon), but at the same time it has another advantage, which I will go into in a moment.

I also have a stock portfolio that consists of stocks with higher dividend yields, solid dividend stocks and dividend growth stocks. I use the higher dividend yield to generate additional income in the first place, thus broadening my portfolio. Of course, the dividend growth stocks don't yield that much yet; their time will come later. They are more or less an investment in the future.

So to diversify in the first place I take a little higher risk, which is balanced by solid dividend stocks (in the overall view).

I am aware that I am not beating the market with this. However, that is also not my intention. I keep the stock portfolio to get different dividends every month. It is simply fun to see so many companies in the portfolio.

All this leads me to the most important reason: Financial freedom.

As described above, this topic is also very individual.

What does financial freedom mean (for me)?

For many (perhaps even most), financial freedom means no longer having to go to work, living on passive income and no longer having to worry about the financial future.

Of course, this requires a high savings rate and/or a frugal lifestyle (or of course a very lucky hand when investing).

For me, financial freedom starts earlier and I would like to broaden it and talk not only about freedom but also about security. This is of course very subjective and someone focused on pure growth stocks will also feel secure or free. Therefore, again: It's very individual and every person is just different.

I set small "goals" for myself and once those are achieved, they are magnified. In doing so, I simply know that I can but don't have to and that is a certain, albeit small, security for me.

As an example: I want to be able to buy 1kg of bananas every week just from dividends so I can pack my pizza. Then the next goal would be an additional 1kg of carrots each week so I can ride a donkey to the supermarket, etc. (🖕🏻)

My goals to start: eating out once a month (right, not just Mäcces). Then have gym membership (more expensive in the village than in the city) paid by dividends. Then have internet and cell phone contract paid, etc.

Knowing that I can theoretically have dividends pay for that in the future is just good.

My car is currently 20 years old. I have a compelling need for it. It's always reliable, but it could just as easily fall apart tomorrow. Knowing that I could then just spontaneously go to a dealership and lease a car while the lease payment is paid by dividends is just comforting.

I could also plan a vacation. Finally to Barsten's Beerbar and the whole trip paid for by dividends. Sure, there would be an annual dividend on it but it would be possible even without that I put aside something from the salary explicitly for vacation.

Next goals: Pay loan installment for the house, replace 450€ job, etc.

So I increase the goals and that allows me just now a certain financial freedom. I have the possibility to use the money for all that. But as long as I don't want (or need) to, the dividends will be re-invested. The security this gives me is: Should my disposable income decrease (rising prices, lower salary due to forced job changes, etc.) and I can only live from salary to salary, then I know that I can still afford certain things here and there through the dividends without any further action. Even without selling shares and thus irretrievably cutting the return.

Summary

The decisive point, and this closes the circle to the initial question, is therefore largely: What is my goal for the future?

As individual as this answer is, so individual is every strategy.

It therefore makes no difference at all whether you pursue a dividend strategy at the age of 20 or are still fully committed to growth at 75. Nobody knows the reasons for this and these are also very difficult, if not impossible, to explain.

My strategy is of course only one of many. Nevertheless, I hope that it @Fabzy is now a bit clearer why one could drive a pure dividend strategy at a young age.

Slow turtles sometimes just need a little longer 😊

Have a great mid-week evening.

#dividende
#dividendenstrategie