An attempt at an explanation
Hi guys,
You know when the post starts with "Hi guys", it might get a bit long again 😬. This time it won't be about numbers, but I want to take another look at the topic of dividend strategy again.
Initial situation
Portfolio feedback is shared on the platform and a 20-year-old once again expresses a desire for monthly cash flow. This happens about once a day. [1]
Why is it young people in particular who, when they start investing, focus on a dividend strategy?
What drives them to focus on monthly cash flow today, given that their savings phase until retirement is well over 40 years?
Why is a dividend strategy so uninteresting for me, for example, and why is it so difficult to convince one person of the other?
I wanted to get to the bottom of these questions and on the way there I had more than one clicked clicked.
I once wrote in a comment that we were having a good discussion about dividends, but that we hadn't reached the end yet. The end would be that everyone accepts each other's strategy without saying a word, perhaps after a few questions. Since we are not here yet, because at the moment everyone is trying to talk every 20-year-old out of the dividend strategy, we are still in the middle of it.
And with this article, I want to get one step closer to our goal and give some possible reasons why we invest the way we do. The whole thing is based on my own observations, discussions 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 this knowledge.
Let's get started.
The order of money - from the perspective of someone in their 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 have followed, what other life milestones I have already reached and what I expect from the rest of my life. The explanation is still pretty vague, so let's get a little more specific.
I was born in 1990, so I belong to Generation Y, 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 about technology and can learn about it at any time, but I know it from its infancy and initially shy away from increasingly present and loud content.
What do I mean by that?
In my early and mid-20s, my thoughts might have sounded something like this:
YoutubeSure, we're all familiar with it, but making videos yourself in front of a camera is something others should do.
Instagram: These are just pictures and I can also share pictures on Facebook.
TikTok15 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 earlier, I wasn't looking to spend all my time on the internet, apart from numerous online games, teen forums, and ICQ chats.
Internet for communication: Yes!
Internet for further education, watching TV, listening to music, pure pastime, exclusive shopping: Not yet!
In my early 20s, I was about to start my career anyway. From school, to university, to my first job, to my second job.
Going on a trip or a work&travel trip after leaving school was the exception rather than the rule. Because if your parents are to be believed, this is where the serious side of life begins, the reason you went to school, the reason you went to university: To earn good money one day and be able to afford something.
Of course, we get a lot of our way of thinking from our parents, but I think we are still the ones who put a lot of emphasis on what our parents exemplified. We open a current account at the same bank, when we vote in our first political election we vote for the party that our parents vote for, when it comes to 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 when we started our careers that no path is predetermined and that you can sometimes shake up fixed structures.
The first job brought the first money into the account, which doesn't take long to become more than you can spend. We, i.e. Generation Y, know no interest on money we have earned ourselves and although we know that we need to make private provisions, we lack alternatives. Although we can choose from a pool of branch bank funds, Riester pensions and building society savings contracts, we only hear and read negative things about all the positive things the bank advisor can tell us.
If we are not made aware of the capital market by relatives or acquaintances, we have to become aware of it ourselves.
Until I but by the time I came across the first Finanztip videos and podcasts in 2019 and 2021, I had already my
order of the money determined.
I go to work and earn my monthly salary. From this salary, I save money in my call money account. The salary is used to rent the first small apartment, plan the first small vacation with my girlfriend and buy the first used car. As the salary increases, the apartment gets bigger, the vacation more expensive, the car more comfortable. The salary is the limiting factor.
The salary has to cover 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. It's always been like that.
The sequence of money from the employer to the current account to the savings account only starts a final further path when we learn late in our 20s through YouTube that we can also make provisions with ETFs. A large proportion of the money that had previously gone into a savings account now goes into a custody account. And that's where it should stay.
The custody account will become a mental storage place for all the money we no longer need until we retire. We have adjusted our living situation to our salary to the extent that we can cover all our 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 any more money each month! I put everything I have too much of today into a deposit anyway. So aiming for more money each month doesn't make sense for mesomeone who is starting to invest after 8 years of professional experience.
If I need to replenish my savings account after a major expense, I simply reduce or suspend the monthly savings installment in the custody account. If necessary, several times in succession.
We started our first job with the intention of working it, or something similar, until we retire. It was only through investing that the idea of reducing our working hours in old age came up. But that is not our primary goal. We feel a certain responsibility to work until retirement and the reason for this is again: because it has always been like this.
The fact that this construct and the familiar order of money order of money, we first have to learn from younger people.
Who are the young people of today?
Learning from younger people. As a 30-year-old, that sounds more difficult than it might seem, do we actually still think of ourselves as "the young" and what can I learn from someone who has less life experience than me?
How I I first learned through getquin: a lot.
Anyone 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, I correct streams, is literally the music for Generation Z, as it is now called.
When the video "What is the MSCI World Index" by Finanzfluss was released in 2016, a Y-er was 26 years old, in the middle of his professional life, a Z-er 18, just about to graduate from high school. Generation Z's first personal contact with the topic of investing comes much earlier, in many cases even before their first full-time paid job, if you add training and possibly university studies on top of that.
Before we go into how this influences investing, we need to find out briefly what continues to distinguish the young career starters from their predecessor generation, particularly in their view of the future, their job and their private life.
Ideally, the latter two in particular should be kept strictly separate. This is also reflected in future planning. Once the possibilities of the money invested have been explored, the desire to reduce working hours in the future quickly becomes loud, without one or the other perhaps ever having been employed. Just dreaming of financial freedom today and working towards it, that didn't happen in my generation, especially not with this frequency.
Above all, Gen-Z wants security. Security in a world full of uncertainties. They want to be free of commitment, mainly with their job. Although job security and the desire for stable structures are at the forefront of their career choices, it is not the case that strong loyalty to the employer prevails. In times of a shortage of skilled workers, this means that companies not only have to compete for new, rare employees, but also for existing ones.
Once Generation Z is on board, they must be given reasons not to simply jump overboard again. Feedback and motivation are important tools in this regard, which are immediately should take place immediately. They are used to it no differently through likes, comments and reactions from social networks.
Immediate confirmation of their work. This is the bridge to a new definition of the order of the money.
The order of money - from the perspective of a 20-year-old
So let's put ourselves in the shoes of a high school graduate, student, young professional or something in between. That's where Z-ers find themselves in these years. Being online all the time, it's only a matter of time before we start thinking about investing our money in the capital market.
In any case, putting our 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 work, received our first salary and already know that we don't want to continue like this for the rest of our lives. Our salary doesn't allow us to make any big leaps yet. We can cover our running costs, but we can only dream of long vacations and a big apartment for the time being.
But we want to be free and independent. The power to decide what, how, where and when should be ours alone. So what influence can I exert today, what foundations can I lay and which ones can I even set in motion?
Most attentive readers of this great platform already know the answer, it is the.... drumroll....
monthly cash flowwhich 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 place to store their thoughts, it has become 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 only used to provide for old age, but the advantage of the extremely long savings phase and the very strong compound interest effect is utilized in order to not only have something from the securities account at the end of the savings phase, but already during it.
For me, these are the reasons why many young people choose the dividend strategy.
It makes a lot of sense, doesn't it?
For the sake of completeness, it should be mentioned that this view is not black and white either. None of the above is set in stone and there is a lot of gray in the way we invest, no matter how old we are. Dividend strategies have always been pursued.
What risks do I personally see with a dividend strategy at a young age?
There is one last chapter that I really want to get off my chest and that perhaps anyone in their early 20s who is a new investor in favor of high-dividend stocks should have read.
It is about the 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 focus on growth, as the long investment period in particular makes it possible to sit out fluctuations and tolerate them very well. I was one of them myself until a few days ago.
But I'm not so sure anymore.
Especially if I'm young and benefit from compound interest for 35, 40, 45 years, couldn't I benefit so much from it that I can afford not just to withdraw for 30 years during retirement, but to have a mix of consumption, reinvestment, strong and weak savings phases over a much longer period, e.g. from my 50s or even earlier?
I think you quickly realize that the already not exactly simple calculation of the pension gap, the necessary savings amount and the resulting monthly savings amount becomes far more complex if you add annually increasing, monthly varying variables to the calculation, but it is not even clear whether these will be added to the calculation or not, because I don't know whether I will reinvest the dividends or not.
And this is the first danger I see. The actual goal is lost sight of. Closing the pension gap and securing provision in old age.
Frequent back and forth during the savings phase means that the initial situation changes more quickly than intended. There is a lack of clarity and structure. A clear plan and constant monitoring are required here. Determining the pension gap is essential, which is difficult when you are just starting out, as you have never received a pension statement yourself.
When you receive your first pension statement, it is essential that you do this! Once the pension gap has been determined, a target amount must be defined that should be reached on retirement. Finally, it must be ensured that this target can be achieved despite the withdrawal of dividends.
When drawing up such a calculation, the greatest difficulty will be to ensure that compound interest does not interfere with the work. This is the second major risk. The first €100,000 are the most difficult, they say. And they will be even more difficult if I don't let the money work for itself. The focus is still on increasing the capital, no longer to the maximum, but at least steadily.
If you try to increase your monthly cash flow by all means in your early twenties, I see a clear danger of having too much monthly money at your disposal in your mid-thirties. Yes, you read that right. I, in my early 30s, claim that I don't need more money each month because everything that's left over ends up in the deposit anyway. Why shouldn't you feel the same way after 10 years of salary increases 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 still consists of your salary and that should be the focus, because even in your mid-30s, you will certainly still be working 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 reduced by at least 25% through taxes and in bad cases is stuck in a low-return dividend portfolio.
The danger I want to draw attention to here is that the dividend strategy at a young age is too short-sighted! Think about your life situation and your portfolio at 30, at 50, at 70, not just 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 forgotten. Dear @DonkeyInvestor demonstrated this impressively in his article [4]. Dividends grow more strongly over a long investment horizon due to price returns, even though the dividend yield may be low. Candidates such as the $VHYL (-0.58%) or the $ISPA (-0.51%) have no place in the portfolio of someone under 50 in my opinion. Dividends may not be needed at the age of 25 to such an extent that you give up a large part of your money for the rest of your life. Here, too, it is important not to think too short-sightedly.
Please also include monthly cash flow growth in your portfolio. There are also ETFs and a large number of individual shares for this purpose.
Finally, I would like to highlight @Epiwho may also find a few answers to his questions in this article 😀 👋
Sources
[1] Subjective perception
[2]
https://www.ibau.de/akademie/wissenswertes/generation-x-y-z/
[3]
[4] @DonkeyInvestor - https://getqu.in/WEG4O1AECMG3/hXyoLaiuK4/
