Moin,
after @Fabzy apparently can't get away from the dividend strategy and has now published his second or third post on the subject (sorry, raccoons aren't that good at counting) in which he tries to understand why young people opt for a dividend strategy, I would like to publish my view on this. Since we are both almost the same age, our start could be (and is) very similar. Nevertheless, we both pursue different strategies. The discussion about dividend strategy or growth strategy or a mixture 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) are focusing on a dividend strategy, even though there is still a lot of time before 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 or to having found the golden path. I am well aware of the possibility of missed returns. Ultimately, however, it is not always just about returns and achieving the highest possible portfolio balance at time X, but also and above all about feeling good and quality of life. @Fabzy In his article, he tries to find a reason why young investors in particular rely on the dividend strategy, even though they still have an investment horizon of easily 30-40 years and are therefore ideally placed to take advantage of any growth. Irrespective of the fact that he admits that he is an old, wrinkly tortoise and I am a young, delicate raccoon, the answer to this is, as he himself has stated (among other things): cash flow.
Foreword
There are an almost infinite number of variables that lead us to a strategy that suits us. Of course, upbringing and experience in our youth are also part of it. The opportunities to obtain information are also part of it. A strategy should of course be fixed, but not set in stone. A strategy can certainly change in life. Even several times. But it should always fit the circumstances.
Similar to the well-known raccoon proverb, everyone is his own pizza baker. While some focus on full growth, others prefer to take it easy and invest in supposedly safer shares, while also collecting dividends, which further slows down company growth.
But ultimately, whatever feels best for you is the right choice.
Why did I opt for the dividend strategy?
In my particular case, there are three points that make me opt for a dividend strategy.
Point 1 is security. When I first started investing, I fell flat on my face. Typical fail, as probably happened to several other people at the beginning, I hope. On the internet you read about quick money and apparently a sure-fire deal. A stock is mentioned, often a Canadian penny stock (what a penny stock is, of course, is unknown, but it doesn't matter. Canadian stock exchange, it can only be safe). I did some quick research and discovered that the share price has risen by almost 400% in 2 weeks. Many comments available, all of which agree (I'm sure it's like the reviews on HolidayCheck). Get in quickly before it's too late. Well, and as luck would have it, that was exactly the top... Stop loss? What nonsense. Far too complicated at the beginning. Besides, it's only a short setback anyway. Well, ignorance is no defense against punishment.
So here's an absolutely important warning: do your own research, understand the company and don't just buy something because it's on the internet somewhere (including Instagram and getquin). And if you do, then at least set a stop-loss order!
Incidentally, the investment in question is currently at -92% for me.
This experience prompted me to bet on less volatile stocks, but at least on well-known names. I had burnt my fingers. Of course, growth stocks are by no means comparable with Canadian penny stocks. 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, these increase with every month and so I can see an increase month after month and year after year. It's simply fun and motivates you to keep going. Some people don't need this motivation and continue to save even if the value of their portfolio falls and falls and falls and don't worry about it. I am glad to have this motivation and needed it all the more when I started out and the mishap with the Canadian penny stock happened to me.
That brings me to
point 3 and thus the core of the article:
Cash flow.
Yes, it is cash flow (and the associated taxes) that reduces returns and impairs compound interest. But it is precisely this cash flow that gives me what I already want today. Financial freedom and an additional income.
Of course, financial freedom can be defined very broadly and is probably different for everyone.
For me, this freedom means that I can already buy things today with money that works passively for me.
What is the goal anyway?
At the beginning, of course, everyone has to ask themselves what their personal goal is. Part of the strategy could then be derived from this.
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 prepared to sell shares later?
- When do I want financial freedom?
- What does being free mean to me?
- What do I need to achieve this?
There are, of course, various calculations that can be made. How much do I need to save and for how long in order to have the following portfolio with this or that return later? Depending on whether I sell shares or not, I can then use this to generate my payouts for as long as I want.
What is my goal now?
On the one hand, my personal goal is to at least close the pension gap, or rather to fill it. On the other hand, I would also like to be able to enjoy financial freedom as early as possible while experiencing less volatility than would be the case with growth companies.
I have deliberately not set myself a specific (i.e. monetary) target.
I want to get the maximum possible within my framework and what I get for my pension 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 broken down into the following areas:
- Reduce/close/exceed the pension gap
- minimize volatility
- Enable a certain amount of freedom now
As you can easily see, my goal is not to achieve the maximum possible return. Nor is the primary goal to have one or two million on key date X. My aim is simply to generate an additional income for my retirement and to have a second income now with as little volatility as possible.
I'm well aware that this means that returns will fall by the wayside, but that's part of the plan.
How do I go about achieving my goal?
Many roads lead to @Barstens waste garbage can.
As individual as the personal goal is, so is the way to achieve it. You can try to beat the market, you can buy growth stocks, ETFs (and there are also countless different variations), dividend stocks, dividend growth stocks or a combination of all of these, and so on. Everyone simply has to find their 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 a 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 with more shares on its own. Despite the fact that the savings rate is no longer available, 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 receive it in 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 come to in a moment.
I also have a share portfolio consisting of stocks with higher dividend yields, solid dividend stocks and dividend growth stocks. I use the higher dividend yield to generate additional income and thus broaden my portfolio. Of course, the dividend growth stocks are not yet yielding so much, their time will come later. They are more or less an investment in the future.
So in order to diversify in the first place, I am taking a slightly higher risk, which is offset by solid dividend stocks (in the overall view).
I realize that I am not beating the market. But that's not my intention either. I keep the share portfolio in order to receive different dividends every month. It's just fun to see so many companies in the portfolio.
This all leads me to the most important reason: financial freedom.
As described above, this topic is also very individual.
What does financial freedom mean (to me)?
For many (perhaps most) people, financial freedom means no longer having 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 speak not only of freedom, but also of security. This is of course very subjective and someone who is focused on pure growth stocks will also feel secure or free. So here again: This is very individual and every person is simply different.
I set myself small "goals" and as soon as they are achieved, they are increased. I just know that I can but don't have to and that gives me a certain, albeit small, sense of security.
For example: I want to be able to buy 1kg of bananas every week just from dividends so that I can wrap my pizza. The next goal would then be an additional 1kg of carrots per week so that I can ride a donkey to the supermarket, etc. (🖕🏻)
My goals at the beginning: Eating out once a month (right, not just Mäcces). Then have my gym membership paid for by dividends (it's more expensive in the village than in the city). Then have internet and cell phone contracts paid for, etc.
Knowing that I can theoretically have this paid for from dividends in the future is just good.
My car is currently 20 years old. I absolutely need it. It's always reliable, but it could just as easily fall apart tomorrow. Knowing that I could just walk into a dealership on the spur of the moment and lease a car while the lease payment is paid from dividends is simply reassuring.
I could also plan a vacation. Finally to Barstens Beerbar and the whole trip paid for by dividends. Sure, it would cost an annual dividend, but it would be possible even without explicitly setting aside something from my salary for vacation.
Next goals: Pay the loan installment for the house, replace a 450€ job, etc.
So I'm increasing my goals and that already gives me a certain amount of financial freedom. I have the opportunity to use the money for all of these things. But as long as I don't want to (or don't have to), the dividends will be reinvested. The security this gives me is that if my disposable income decreases (rising prices, lower salary due to a forced job change, etc.) and I can only live from salary to salary, then I know that I can still afford certain things here and there thanks to the dividends without having to do anything else. Even without selling shares and thus irretrievably reducing the return.
Summary
The crucial point, and this brings us full 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 is therefore completely irrelevant whether you are pursuing a dividend strategy at the age of 20 or still fully committed to growth at 75. Nobody knows the reasons for this and it is very difficult, if not impossible, to explain them.
My strategy is of course just one of many. Nevertheless, I hope that @Fabzy now a little clearer why you could pursue a pure dividend strategy at a young age.
Slow turtles sometimes just take a little longer 😊
Have a nice evening in the middle of the week.
#dividende
#dividendenstrategie
