FULL DISCLOSURE:
I am not a financial advisor. This post is to provide information and not provide financial product advice. I discuss why I personally chose to invest in a stock, ETF, REIT, investment fund or cryptocurrency (which I have held for over a week) and also share information that is public about the following stock, ETF, REIT, investment fund or cryptocurrency and they are based on my own personal opinion.
I will not blog about any positions of stocks, ETFs or REITS and cryptocurrency which were initiated just within the last 72 hours of posting this blog article.
It is recommended that you should always consider visiting a financial advisor for independent financial advice before making investment decisions.
I do not work in the financial industry, so just because I write about it, doesn’t mean you should own it. So, consult with a financial advisor and do your due diligence, RESEARCH!
I am not receiving compensation by the company for this blog post.
I have no working relationship with any company whose stock, ETF, REIT or cryptocurrency mentioned in this blog post. Nor do I have a family member or friend who works with the company.
Want passive income through dividend investing? I sure do!
If you are wanting to become a dividend investor, one of the things you will need to ask yourself is:
- Am I willing to take on risks? Or do I want to play it safe?
- Do I want the most in dividend returns now through retirement with risks? Or do I want to invest in a safe ETF with dividends but with growth?
- Am I content owning a full share of a stock? Or am I just fine having fractionals of shares of multiple stocks all in one basket?
- Do you want growth ETFs in the end which pays good dividends with a small annual fee (depending on the ETF)? Or value stocks which pay even better dividends without paying an annual fee?
When I started out with dividend investing, I chose safety through ETFs. When I started with investing in stocks, I invested incorrectly.
I invested in a stock, it would go red for days, I would panic and sell and lose money.
I was also investing in expensive stocks, some that paid dividends, many that don’t and that was quite risky. There was no strategy, I only invested in companies that I had high conviction but with no fundamentals.
For example, as a person who traveled to Japan, I thought to myself, “Wow! Wouldn’t it be great to invest in companies in Japan!”. I was investing in the Japanese train companies, only had Robinhood back then (which doesn’t provide a lot of information like other brokerages) and they were OTC Pink Sheet Stocks and figured, these were safe because they are shares sold on Robinhood.
So, without any research, I was investing in Japanese companies and I felt I was just losing money. Then when meme stocks were popular, I started investing in meme stocks (by the time it was too late) and I was losing money.
So, I said to myself, I’m going to restart and invest in ETFs (Exchange-traded Fund). An ETF is a basket of securities you buy or sell through a brokerage firm on a stock exchange.
Also, I’m going to study vigorously and soak as much in to learn about investing, dividend investing and learn, learn learn! Observe the market and learn from many other dividend investors, especially those who were successful.
So, let’s start out with the first example of Dividend ETFs vs. Dividend Stocks
EXAMPLE 1: Dividend/Consistent Growth ETFs (those which track an index) – VOO, QQQ, DIA
I invested in VOO (Vanguard S&P 500 ETF) which tracked the S&P 500 Index, QQQ (Invesco QQQ Trust) which tracked the NASDAQ-100 and DIA (SPDR Dow Jones Industrial Average ETF Trust) which tracked the Dow Jones Industrial Average and they had low gross expense ratios and they offered growth.
I purchased on the dip and I chose them for its low expense ratio.
VOO had stocks such as Apple, Microsoft, Amazon, Facebook, Alphabet (Google), Tesla, Berkshire Hathaway Inc Class B, JPMorgan Chase & Co., Johnson & Johnson and many more. QQQ has similar holdings, while DIA has UnitedHealth Group Inc., Goldman Sachs Group Inc., The Home Depot Inc., Microsoft, Boeing, Amgen, Salesforce, Caterpillar, Visa, McDonalds as their primary holdings.
But you can see, an ETF has several holdings of companies of different sectors. The more diversified the ETF, potential of great growth.
VOO has 509 companies for its total holdings, QQQ has 103 companies for its total holdings and DIA has 31 companies for its total holdings. You can literally say that you own part of Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, etc. You may not own a full share but you own a fraction of it through an ETF!
VOO had a gross expense ratio of 0.03% and even better, it offered dividend distribution of $5.28 annually in 2020 per unit. March 10th produced $1.17, June 29th was $1.43, Sept. 29th produced $1.30 and December 22nd produced $1.38. In 2020, QQQ paid $1.72 in dividends annually per unit and DIA paid $4.15 in dividends annually per unit. That’s about $11.15 in dividends for one unit combined for each annually in 2020.
While VOO and QQQ paid quarterly, DIA paid monthly. But what if you had 12 units in 2020 of each. How much is that in dividend income annually in 2020?
VOO (12 units): $5.28 x 12 = $63.36 in dividend income
QQQ (12 units): $1.72 x 12 = $20.64 in dividend income
DIA (12 units): $4.15 x 12 = $49.80 in dividend income
TOTAL: $133.80 in annual dividend distributions for each (Total spent in one year: $12,896.88) and then you would have to subtract the expense ratio fee per share.
Yes, with ETF’s, each position has a fee. VOO (.03% annually), QQQ (.20% annually) and DIA (.16% annually).
Here is a reference courtesy of thebalance.com:
- A fund that has an expense ratio of .20% costs the equivalent of 0.002 of the amount you have invested.
- A fund with an expense ratio of 1.10% annually costs 0.11 of the total assets you have in the fund.
- A fund that charges 30 basis points charges .30%, or 0.003 of the amount you have invested per year.
Expense ratio fees are not taken from your account or investment. Instead, they are deducted from the total assets of the mutual fund before you get your share. If, for example, the investments owned by your mutual fund deliver an annual return of 10%, but the fund has an expense ratio of 1%, your actual return, less fees, is 9%.
This is why expense ratios represent a cost for shareholders for holding a mutual fund. The lower the expense ratio, the better, because you annually get to keep more of the fund’s returns. The result is a higher investment value at the end of the investment holding period.
Currently (as of today, June 10, 2021, closing price), VOO is $389.41, QQQ is $340.35 and DIA is $344.98 per unit. Let’s say, you only had $12,900 to invest in all three, once a month, 12 units total for the year.
So, just for an example, we know the prices fluctuate every market day but let’s say these prices stayed the same throughout the year (yes, unrealistic, but again, this is just to show an example):
VOO – $4,672.92 for 12 units in one year
QQQ – $4,084.20 for 12 units in one year
DIA – $4,139.76 for 12 units in one year
So, let’s take a look at VOO and it’s performance in the last ten years.
If the momentum from 2021 to 2030 is similar to 2012 to 2021 and I continue to invest one unit every month for over a decade or two decades. Because of its constant growth, by the time I retired, if I wanted to pull it out, I would have a hefty amount of money invested and would have earned dividends which I could use to reinvest or use those dividends as passive income.
Imagine, in 2010 it was $102.50. Today, it’s at $389.41. Is there a possibility it may reach $700 per unit in 2030? Who knows but you have to admire that growth.
Investing in index tracking ETF’s are usually hands off, just invest and by doing your research, know that certain ETFs are safer than investing than normal stocks because the ETFs are diversified and companies are from different sectors.
But remember this… Not all ETFs are safe. Not all ETFs are the same. Do your research, especially on their past performance and their annual distributions.
The iconic investor Warren Buffet wrote in his 2016 Berkshire Hathaway annual shareholder letter, “”My regular recommendation has been a low-cost S&P 500 index fund”.
“A low-cost index fund is the most sensible equity investment for the great majority of investors,” Buffett told Vanguard founder Jack Bogle in his book ‘The Little Book of Common Sense Investing’.
“By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals,” Buffett explained.
And these ETFs are attractive because again, they are a basket of stocks that represent a broad market.
With VOO, QQQ or DIA…you are buying a small piece of the largest publicly traded US companies. and the price of these ETFs reflect that.
Now, let’s say if you went the other route for dividend investing? Not growth ETF’s that produce dividends but dividend stocks?
Let’s say you wanted to invest a high dividend paying stock which is a “Dividend King” such as Procter & Gamble (PG). We’ll focus on this one stock only (most people have many stocks but for example, let’s just focus on one). PG is a popular dividend paying stock in the Consumer Discretionary sector.
Currently, it’s at $135.79 and pays an annual dividend of $3.48 in 2020 per share. In 2020, one share paid $.74 in dividends on Jan 2020, $.79 for April, July and October 2020.
So, remember…for the ETF’s, for 12 units of VOO, QQQ and DIA it cost $12,896.88. Let’s continue with the notion that there is $12,900 available to invest.
With that much money, how many shares can I purchase of PG?
If PG was $135.79 all year round (again, this is just an example), you spent $12,900.05 for 95 shares of PG. That would be $330.60 in annual dividend income in 2020.
So, let’s compare:
ETFs (VOO, QQQ, DIA):
VOO (12 units): $5.28 x 12 = $63.36 in dividend income annually.
QQQ (12 units): $1.72 x 12 = $20.64 in dividend income annually.
DIA (12 units): $4.15 x 12 = $49.80 in dividend income annually
TOTAL: $133.80 in annual dividend distributions for each (Total spent in one year for 12 units of each ETF: $12,896.88) (not inc. the expense fee)
STOCK EXAMPLE 1: Dividend King (Procter & Gamble, PG)
Many investors prefer to focus on Dividend Kings and Dividend Aristocrats because these companies have been tested through the ups and downs of the economy for decades.
To classify as a Dividend Aristocrat, the stocks must be members of the S&P 500 and have increased their dividends for at least 25 years. They also must have a market cap of $3 billion, average at least $5 million in daily share trading value and the minimum number of constituents more than 30% of the index weight.
But the elite group within the Dividend Aristocrat Index are known as Dividend Kings. The primary difference is that their dividends have been increased for 50 years in a row and have the longevity, no matter if there is a stock market crash or a pandemic, these companies continued to increase their dividends each year.
Procter & Gamble Co. (NYSE: PG) is a Dividend King! Again, their closing price as of June 10th is $135.79. With $12,900 to invest, you can purchase 95 shares.
PG (95 shares): $3.48 x 95 = $330.60 in dividend income.
TOTAL: $330.60 in annual dividend distributions annually for 95 shares at $12,900.
So, as you can see, stockwise, you earn more in dividend income with PG annually if you invested nearly the same amount per month. There are no fees either like ETFs.
BUT…unlike an ETF with many holdings from different sectors in one basket, you have a volatile market where you go through ups and downs.
Let’s take a look at PG’s ten year:
PG for the most part has gradually gone up since 2021 but some people may panic sell when they see drops and a stock staying red for nearly a few few months.
But if you bought in early, you can see growth, but for the most part, dividend investors, they like to see growth, but also dividend growth and being a Dividend King, it’s what these stocks are known for.
So, as you can see why people like going with a Dividend King like PG to invest long term.
But now, I’m going to introduce a third example, but this one is another stock. They are not Dividend Kings, nor are they Aristocrats. They are not expensive, they are known for its value, its higher yield and good paying dividend but is much riskier to invest in (they are often found in financial, real estate, energy or utility sectors), so you can’t just be passive and not look at for weeks or months.
If you are going to invest in these type of dividend stocks, you’ll need to pay attention and do your own due diligence or hire the services of a professional who will manage your financial investments for you.
So, we’ll stay with the same amount. If you had $12,900 to invest.
STOCK EXAMPLE 2: VALUE (High Dividend, High Yield) – Lument Finance Trust (NYSE: LFT)
Let’s look at a REIT (Real Estate Investment Trust) such as Lument Finance Trust (NYSE: LFT) which (as of June 10th closing) is at $4.00 a share. The annual dividend rate is .36 cents set for 2021 per share and a high yield of 9.35%.
Their annual dividend payout was $1.50 in 2014 but has dropped in 2017-2020 and hasn’t been all that consistent. But why invest in something that has fallen and not so consistent? Using 2021’s annual dividend of .36 per share, why investors tend to like this REIT is because it costs $4.00 a share.
For value investors who want to invest but can’t purchase many units of a $389 ETF like VOO or purchase many shares of a dividend king like PG at $135, a lot of these investors look for dividend producing stocks which are cheaper. And the fact that these value-based stocks, their companies haven’t suspended or ended their dividend is important to them.
So, with $12,900 to invest, you bought 3,225 shares of LFT in a year. That would mean you would earn $1,161 in annual dividend passive income.
In 2020, one share of LFT paid $.075 in April and July, .$085 in October and a special dividend of $.04 in Jan. 15, 2021 and a regular dividend of $.09 in January 15, 2021.
But if one share produced $.09 quarterly, if you had 3,225 shares…that’s $290.25 dividend payments per quarter.
If you set your stock to to DRIP (reinvest for the stock), then more shares of LFT would be purchased (about 72 shares per quarter would be purchased if your dividends were reinvested at $4 a share) but if you don’t set it to DRIP, it will just add the money to your account and you can purchase shares of another stock, units of another ETF or transfer that passive income to your bank account.
So, with this third example you can see why there are dividend investors who love these value dividend producing stocks. If you own a lot of shares, it can lead to a solid payoff in dividends.
But let’s examine this a little and get to know the risks involved.
Let’s take a look at the chart below.
LFT is not a growth stock. It went from $15.45 in May 2013 to its current price of $4.00 in June 2021. Can you imagine if you invested at the beginning. Not sure who would have held to see their initial investment fall so low, but hopefully they pulled out after losing 15% in the beginning and reinvested it with the low cost of +/- $4.
Two months after the stock’s debut, it lost $3 and it continually to drop until it went around $4 in 2016 and during the pandemic of 2020 it dropped to $1.37. But LFT still managed to pay its dividend of .37 annually even though their stock dropped in price to its lowest during the pandemic.
Now for those who purchased LFT on the dip at $1.37 and to see it grow to $4 and pay its dividends, that’s like a bonus! But of course, you want to see a stock success and see growth and hopefully LFT will return to its former glory of over $12-$15.
But this is an example of a risk, may it be a market collapse or real estate collapse, a lot of high yield, high dividend, stocks can be affected.
So, if you manage your own stock portfolio and have value stocks that pay high dividends with a high yield, you’ll have to keep a close eye on it. Especially if interest rates rise, if there is a market crash.
You need to prepare for the volatility in the market.
You’ll need to know when to buy on the dip, sell if it goes below your comfort zone and you may want to invest that money elsewhere or when to hold and hope the stock goes back up to where it was before.
That is where it can get risky. With some value stocks, their dividend payouts can be inconsistent, so do know that coming into it.
But one should remember, when it came to value investing, Warren Buffet is one of the most iconic and successful investors of our time and he was master of value investing and had the patience, discipline and risk aversion.
EXAMPLE 4: RISKY DIVIDEND ETF’S WITH BARELY ANY GROWTH BUT WITH AN INSANE YIELD AND PAYS MONTHLY DIVIDENDS
This is another example you will see people talking about on Dividend Facebook pages and on Reddit. QYLD (Global X NASDAQ 100 Covered Call ETF), RYLD (Global X Russell 2000 Covered Call ETF), NUSI (Nationwide Risk-Managed Income ETF), JEPI (JPMorgan Equity Premium Income ETF), an ETN like USOI (Credit Suisse X-Links Crude Oil Shares Covered Call ETNs), to name a few.
But these are ETF’s people are in it for the long run. These ETFs don’t have much growth and for certain ETFs like QYLD, if you sell it, you won’t get taxed on growth but you get taxed on the entire price of the ETF when you sell it, even if it’s a loss, you are taxed for the price you paid for it. That’s why people say they will hold on to these for the rest of their lives. They get into it primarily for the dividend.
I’ve written about Global X NASDAQ 100 Covered Call ETF (QYLD) before, but let’s take a look, using the same amount of $12,900 to invest for the entire year.
QYLD cost about $22.40 per unit right now (as of closing on June 10th). The expense ratio is quite high at .66% but the dividend distribution is monthly.
From June 2020 to March 2020, as you can see, it has a high distribution yield of nearly 12%, just these 12 months alone, it’s around $2.60 per unit annually.
But let’s say you had $12,900 to invest for QYLD for the entire year (not realistic, but let’s say the price stays around $22.40). That’s about 575 units.
QYLD (575 units): $2.60 x 575 = $1,495 in dividend income annually and since they pay monthly, while there dividend payouts are different monthly, if they were even, that would be $124.58 per month of passive income. Granted, there is also an expense ratio of .66% which is high! So, you’ll lose a bit per year for every $1,000 invested.
When I see people who say they own over 1,000 or even 10,000 units of QYLD, that’s amazing.
But again, these are covered calls and they are RISKY! These ETFs are not for growth. Investors on various investing sites or dividend discussions say they are in it for the long term and strictly for monthly dividends.
No surprise that the largest holders of QYLD are banks such as LPL Financial (2.3 million units), UBS Group AG (2.0 million), Morgan Stanley (1.7 million), Bank of America (947K), Wells Fargo & Company (840K), etc.
But these are just a few examples of dividend investing. Some purchase options, some invest in even riskier leveraged and inverse products such as Direxion ETF’s like SPXL (Direxion Daily S&P 500 Bull 3X Shares).
There are also ETNs, ETF’s and other dividend investments where people like to take a bit more risks.
So, what is my strategy? One answer: Diversification
- Do I invest in Dividend ETFs?
Yes, I do. But in order to qualify in my portfolio, they are value-based ETF’s that incorporate the popular companies such as what is featured in VOO and QQQ, have a low or no expense ratio and produce dividends preferably monthly.
For me, I invest in Fidelity’s No Expense Ratio Index Funds. They do pay a dividend, either once or twice annually but for these, I focus on growth and because they are inexpensive, I keep adding to it, like one would invest money into their Roth IRA. And there is no minimum investment.
I took a cue from Warren Buffet, which was to invest small amounts slowly over a long period of time (dollar-cost averaging) and is perfect for long-term investors. Buffet also said, “never overpay in fees” and while Warren Buffet loves Vanguard, but I went for the 0% fee and no minimum investment which Fidelity offers: FZROX, FNILX, FZIPX and FZILX.
But I do invest in a few ETFs. An example is SPDR Portfolio S&P 500 High Dividend ETF (SPYD) which has a gross expense ratio of .07% and 79 total holdings. In 2020, it paid a quarterly distribution of $0.39 in March, $0.36 in June, $0.26 in September and $.60 in December and has a distribution yield of 4.50% and is only $42.18.
SPYD offers a one-stop option for investors to gain access to large-cap stocks with an average dividend yield over 3x that of the broader equity market.
But unlike my other funds which cover popular names like Apple, Amazon, Alphabet, Tesla, etc., it has 75 holdings in large cap companies of around under 2% for Seagate Technology, Iron Mountain, Regency Centers, Simpon Property Group, ConocoPhillips, Marthaon Petroleum Corp., Federal Reality Investment Trust, Invesco., Ltd, Lumen Technologies, etc. So, it’s a mixed bag of large cap companies.
- Do I Invest in Dividend Kings and Dividend Aristocrats Stocks?
Yes, I do. I invest in all eleven sectors and when selecting which stocks to invest in each sector, I chose to go with Dividend Kings and Aristocrats. I have confidence in stocks which are Dividend Kings.
The sectors are:
- Communication Services
- Consumer Discretionary
- Consumer Staples
- Energy
- Financials
- Health Care
- Industrials
- Materials
- Real Estate
- Technology
- Utilities
- Do I invest in what can be risky high yield/high dividend stocks?
Yes, I do. I invest in numerous financial, energy and REITs that have a high yield, solid dividend and a great price. But I do keep a close eye on them and if I see any warning signs in the market, I will not hesitate to put a stop/loss. And after a year of having them in my portfolio, if they are operating at a loss and show no improvement and also cut their dividend, I will sell.
- What is my main goal?
My main goal is passive income. I’ve seen family and friends who lived healthy productive lives but when they got older, may they have gotten injured or lost their job, they are left with no income, on disability or social security and some who had to cash in their 401K.
There was a time when retiring early and wanting financial independence was important to me. But now, what is most important to me is growing passive income year after year. If it’s enough for me to retire early and live on passive income, that’s great! But I live my life with the urgency of not knowing what tomorrow will bring.
You can be wealthy today, but what happens if something happens to you where you can no longer produce that income. Are you earning enough passive income to comfortably live on. For most people, they don’t. But for those who were smart to invest early and generate passive income, that’s great!
So, for now, I would rather live a simple, frugal life and divert it to things that earn me a passive income and my main focus is towards investing in both dividend ETFs and dividend stocks but also finding even more ways of earning passive income.
Passive income is great, but know that for dividend income you receive each month or each quarter or each year, may you cash it out or reinvest it, you still will be taxed for it. Just know that you will need to include this in your taxes (whether you file as individual or joint) as additional income.
But the fact that people have been able to retire or earn so much on dividend income (like this and this), is inspiring.
As always, perform your due diligence and do a lot of research before investing. Talk to a financial advisor and find out if dividend investing would be a perfect investment for you.
