One thing that I’ve learned from all of my reading of finance blogs and articles is that if Jake and I want to retire before 60 we not only will have to save our butts off but we also will need to generate passive income. There are lots of ways to earn passive income and we will be exploring a lot of them (and sharing them as we go along), but the one we are actively pursuing now is dividend investing.
I love finance and I love reading and educating myself on investment strategies. Because of this we are really dedicated to dividend investing. For those of you who don’t know what this is, in a nutshell, we are building our portfolio primarily with stocks from companies that pay out dividends (small payments made throughout the year) to their stockholders. Reinvesting the dividends and adding fresh capital has been growing our portfolio faster than expected and we are super pumped! For example, about 5 years ago we invested $5,000 in dividend stocks. Today, without adding a penny to those stocks our stock value is at $12,539. Boom. My money made me $7,500 and I didn’t have to do anything. Compounding interest is the bomb (who knew math class really would pay off!). Time and compounding interest work harder than I ever could (and lets be real, I’m a terrible worker!). If someone would have told me at 18 to start investing the way we are now we would have about $150,000 more! That is a crazy amount of money folks! That’s a house, 3.5 fully loaded Mustangs, a college education, 37,500 cases of Diet Coke, or 50,000 Big Macs!
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So what is our strategy? Well, while we aren’t Warren Buffet, we do have a plan in place to help us choose stocks. We aren’t big risk takers, so we really value companies that have strong performance records and a history of increasing dividend payouts. We also take a leering look at their annual report, financial reports and their balance sheet. A company that has a good asset to liability ratio, cash reserves and increasing net sales is a company we would consider investing in. You have to be confident in the company you are handing your hard earned money over to. Someone once told me you should only invest in a company if you know exactly what a company does (and are able to explain it to someone else), and trust that they’re stable enough to be around in 30 years. Put it this way, would you be okay if you lost all access to your stocks for 30 years? If you trusted a company enough to still be running, and running well in 30 years it’s a good bet. So this is how we invest.
Eventually our goal is to be able to fund all of our living expenses entirely on dividends. How cool would that be? Our stocks would be working for us, providing us with income that we don’t have to do anything to earn. Even if we never cash them out we will be making a monthly income! Champagne for everyone!
So where did we start? We started by investing in companies that have a great track record and that we believe will be around for years to come. Johnson and Johnson is one of those companies. Their products have a place in the market now and will for years and years to come. They have a proven track record of adapting and changing with new market demands and that makes us feel great!
Another that we started with is Pepsi Co. Some may argue that the snack food industry is in a decline, but Pepsi will continue to make products that consumers buy. I have a hard time believing that the company that invented Cool Ranch Doritos could disappoint me too much!
We have about 20 other companies, but those are a few of the ones we really feel are a good investment. I would recommend them to anyone I know, however, I do think that anyone thinking of investing should educate themselves first. A few great reads to get you started are
- “One Up on Wallstreet” by Peter Lynch
- The Intelligent Investor by Benjamin Graham
- The Ultimate Dividend Playbook: Insight and Independence for Today’s Investor by Josh Pete
They may not be as exciting as that People magazine you’ve been eyeing, but the knowledge will last longer than Kim and Kenya’s marriage.
The one thing we do have to remind ourselves of is that the money we have invested isn’t safe. We do try to choose stock with low volatility, but we don’t invest money that we can’t lose. So far we are doing really well and on track to an early retirement, but only time will tell!
The best advice I got before we started investing is that the price of the stock only matters when you want to sell. You cant beat yourself up over a few dips here and there it only matters when you need to sell the stock! So keep on trucking!
What do you think about investing? Do you prefer dividend stocks or others? What’s your plan for retirement?