Monday, August 29, 2011

Dividend and Compounding of Money

An inspirational writing of a successful dividend investor:

Dividend Income from my portfolio allows me to buy more and more shares without spending a single dollar from my pocket. The more shares I buy which yields high dividends means more free-money in my hand to buy more shares. This is a vicious circle that is making me richer each day. The effort I do is selection of value shares that also pays high dividends. Dividends are actually passive income. I am able to generate this money without actually working for it.

There was a time when my Investment portfolio was worth just $5,500 but I was able to select wisely some quality companies that also paid high dividends with good predictability. At that time the dividend yield of my portfolio was not more than 1.5% p.a, means I was annually making about $80 per year. But I went on accumulating value stocks and today I am able to generate more than $10,000 per annum just from dividend income. I know this is not enough but consider it like this, I do not have to work for these $10,000. They are like automatically getting generated by my shares portfolio. I do not have to work for this money. For a new investor like me, what else I could have demanded.

I have an internal target of generating enough dividend income in coming few years that is not only sufficient to pay all of my monthly expenses buy also leaves me enough for buying few money quality stocks. My monthly expenses are close to $2,000, so this makes up $24,000 per year. If I am able to invest $300 per month I will be happy. So this amounts to another $3,600 per annum. Hence I can say that if I am a able to generate dividend income of $27,600 per annum I will be happy. But what happens to inflation? Yes true, my portfolio shall be strong enough to increase my dividend income at a rate equal to or more than the rate of inflation. This is possible in Ideal world, but in practicality what I am required to do? Lets see..

You can find online some shares that are boasting of high dividend yields like 25% per annum. Do not believe them, not that they are not paying such money now, but they will stop such philanthropy tomorrow. Better is to take the approach of value investing. This form of investing is practiced by the champion investor Warren Buffett.

Value investing allows you to buy some quality shares like that of Google, Microsoft, Apple, McDonalds, Coca Cola etc at unbelievably discounted rates. In other words we can say that value investing allows us to buy top-quality shares at undervalued prices. Now this is a million dollar question that how to find quality shares which are undervalued? I know this is not simple and cannot be learnt in a one day training course, value investing tips are more a way of investing than a lesson. Value investing is a investment discipline that grows and betters with practice. So go ahead and learn value investing.

The moral of this story is practice value investing, which in turn will allow you to but quality shares at undervalued rates. When quality shares are bought like this it makes you eligible for high dividend yields. The higher the dividend the higher will be your passive income, the higher the value of passive income the higher is your chance to become financially independent. This is the big goal, yes financial independence is what you want to achieve and you can do this by investing intelligently. Investing (buying and accumulating shares) with the focus of high dividend income can make you financially independent. You will no longer be required to ‘work for money’ in order to earn your living, instead let the money work ‘for you’. Dividend focused investing is the way of letting yourself attain financial independence.
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