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can dividend investing make you rich

1: Your Savings Rate

The most important thing for anyone that wants to attain financial freedom is savings. If you do not save money, you will never have the capital to invest your way to financial independence. As a matter of fact, under most situations, you have more control over your savings rate, than the returns you will earn as an investor.

If you earn $50,000 per year, you can accumulate $10,000 in savings within one year if you save 20% of your income. In this case, your annual spending is $40,000/year. The $10,000 you saved will be sufficient to pay for your expenses for 3 months.

If you figure out a way to cut your expenses and to save 50% of your income, you will be able to save $25,000 in one year.

The point is not to focus on absolute dollars, but on the savings percentages. The point is that you have a higher level of control over how much you save, and this has a higher predictability of success when building wealth, than the returns on your investment. Unfortunately, future returns are unpredictable. Dividends are the more predictable component of future returns, which is why I am basing my retirement on dividend income.

This is why I have found it important to keep my costs low, in order to have a high savings rate and accumulate money faster. I have been lucky that I have essentially saved my entire after-tax salary for several years in a row. Besides keeping costs low, I have achieved that by trying to increase income as well.

2: Your Investment Strategy

The second important thing you have within your control is the type of investments you will put your money in. It is important to understand that despite a history of past returns, future returns are not guaranteed. You have no control over the amount and timing of future returns – the best you can do is to invest in something you understand and something that you will stick to no matter what.

In my case, I invest in dividend paying stocks with long track records of regular annual dividend increases. Others have made money by investing in business, real estate, index funds, bonds etc. The important thing is to find the investment that works for you, and to stick to it.

I do this, because I have found that dividend income is more stable than capital gains. Plus, I want to only spend earnings in retirement, not my capital. With this type of investing, I am getting cash on a regular basis, which I can use to reinvest or spend. It is much easier to generate a return on my investment, and to stick to my investment plan, when I am paid cash every so often.

3: Time In The Market

The third important tool at your disposal is your ability to compound your investments over time. You have some control over the amount of time you will let your investments compound.

Over time, a dollar invested today, that compounds at 10%/year should double in value every seven years or so. This means that in 28 – 30 years, the investor should have roughly $16 for each dollar invested at 10%.

Of course, if the investor doesn’t allow their investments to compound, they would be worse off. Many investors are sold on the idea of long-term compounding. Unfortunately, a large portion end up trading far too often for various reasons.

One reason is fear during a bear market. Another is the desire to take a quick profit, without letting compounding do its heavy lifting for them. I have observed people panic and sell everything when things sound difficult. Another reason for selling is the attempt to time the markets or the attempts to replace one perfectly good holding for a mediocre one.

In most situations, the investor would have been better off simply holding tight to the original investment. Almost no one can sell at the top and buy at the bottom – so don’t bother timing the market. Most investors who claim that they have avoided bear markets do so, because they are often in cash. Therefore, they miss most of the downside, but they also miss most of the upside as well.

The best thing you can do is find a strategy you are comfortable with, and then stick to it. There aren’t any “perfect” strategies out there, so if you keep chasing strategies you are shooting yourself in the foot. As a matter of fact, you would likely do better for yourself if you buy long-term US treasuries yielding 3% and hold to maturity, than chase hot strategies/sectors/investments. So find a strategy, and stick to it through thick or thin.

4: Keeping Investment Costs Low

What does that mean? It means to keep commissions low. When I started out, I paid a zero commission for investments. I then switched to other brokers and tried to never pay more than 0.50%. But this is too high – there are low cost brokers today, which charge little for commissions. Try to keep costs as low as possible, because that way you have the maximum amount of dollars working for you.

It also means to make sure to minimize the tax bite on your investment income as well. Once I really spent time to learn how to minimize the impact of taxes on my investments, the rate of net worth and dividend income growth increased significantly. I have calculated that a person who maximizes tax-deferred accounts effectively in the accumulation phase could potentially shave off 2 -3 years for every ten years of saving and investing.

In order to keep costs low, the amount of fees you pay to an adviser should be eliminated. Most investment advisers out there do not know that much more than you do. If you decide to educate yourself on basic finance, you will likely know as much as most investment advisors. It makes no sense to pay someone an annual fee of 1% – 2% per year on your investment portfolio. The long – term cost of 1% – 2% fee compounds over time to a stratospheric proportion. It makes no sense to have someone who doesn’t know that much charge you 1% – 2%/year merely for holding on to your investments.

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