How To Invest In Dividend Paying Stocks & NEVER WORK AGAIN
Published: 2024-02-06
Status:
Analyzed
Published: 2024-02-06
Status:
Analyzed
Predictions from this Video
Incorrect: 0
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Topic
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VTI is a total stock market ETF by Vanguard, offering investment in the entire US stock market.
"So, if you wanted to just invest your money in the stock market, you can invest in a fund like VTI. VTI is the total stock market ETF created by a company called Vanguard."
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SPY is an ETF providing exposure to the S&P 500, representing the 500 largest companies in the stock market.
"SPY is another fund which gives you exposure to the S&P 500. That means now you're getting exposure to the 500 largest companies on the stock market."
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SCHD is an ETF focused on dividend-paying companies, providing exposure to this specific investment category.
"SCHD is a fund that gives you exposure to dividends, dividend paying companies."
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If a company's stock price doubles and they aim to maintain a 3% dividend yield, their dividend payout per share must also double, resulting in a higher effective dividend yield for early investors.
"If they want to maintain this 3% annual dividend, they're going to have to double how much money they're paying out in dividends, too. which means now they're not paying $3 a share, they're paying $6 a share in dividends, but you didn't buy the stock at $200 a share. You bought in at $100 a share. So yeah, while the people that are buying it today are getting a 3% return on their money, you bought in here. So you're actually getting a 6% return on your money because you bought the stock for $100 a share and now they're paying you $6 a year in dividends per share that you own."
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Holding a stock for 10 years through two price doublings, while maintaining the dividend yield, can result in a 12% return on initial investment, a fourfold increase from the initial 3% yield.
"And so, if you bought into this company at this point and you held your stock for 10 years, and the stock doubled twice, and they wanted to maintain their same dividend yield, now you're making a 12% return on your money, not a 3% return on your money, which means you just 4x the amount of money you're making in dividends by doing nothing except holding the stock."
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Through sustained company growth and dividend increases, the investment needed to generate $60,000 in annual dividend income can be reduced from $2 million to $500,000.
"Now, if the company you invest and follows this type of growth where they can double twice and the dividend value doubles twice over the course of you holding it, now you don't need to invest $2 million to get this $60,000 a year. you need to invest half a million dollar, $500,000 because now if you invest $500,000 at this price and the dividends go up to 12%. Now this 12% return on $500,000 worth of invested cash is going to give you $60,000 a year."
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ETFs simplify investing by reducing the need to track individual companies.
"The nice thing about ETFs is it makes investing a lot more passive for you because now you don't have to keep up with every individual company."
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VOO and SPY are examples of ETFs that provide exposure to the S&P 500.
"A couple ETFs that will give you exposure to the S&P 500 are V and SPY."
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A total stock market ETF offers investment exposure to the entirety of the stock market.
"So, a total stock market ETF gives you exposure to the entire stock market."
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VTI is an example of a total stock market ETF.
"kind of like VTI."
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QQQ is an example of an ETF that provides exposure to the NASDAQ 100, which consists of the 100 largest non-financial companies.
"So the first example of this would be investing in something like QQQ."
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SYLG is an example of an ETF that invests in small-cap growth companies.
"This one gives you exposure to the smaller cap growth companies through something like SYLG."
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Index funds typically have significantly lower expense ratios (e.g., 0.04%) compared to mutual funds (e.g., 2%), resulting in substantial fee savings for investors.
"0.04% in fees means that for every $100 you invest, you're going to be paying four pennies in fees. Compare that to the 2% fee you'd have to pay with a mutual fund where you're paying $2 out of every $100 you invest."
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Index funds can only be traded once a day, whereas ETFs can be bought and sold like stocks throughout the trading day.
"Index funds like VFAX only let you buy and sell this index once a day... The alternative to investing in an index fund like this is investing into an ETF... because ETFs that you buy and sell these funds kind of like stocks. You can buy and sell these ETFs whenever you want."
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Vanguard index funds may have a minimum investment (e.g., $3,000), while ETFs like VOO (the ETF version of VFAX) do not have a minimum investment beyond the price of a single share.
"Remember, with the Vanguard index fund, you had a $3,000 minimum investment... With VO, you don't have a minimum investment. All you have to do is buy one share of this ticker symbol."
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Index funds often facilitate automatic investing, while ETFs typically require a brokerage service to automate the process.
"the index fund allows you to automatically invest or withdraw your money... versus with this ETF, you cannot do that unless you're using a brokerage that can passively invest your money for you."
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Investing $528 monthly in an ETF for 30 years at a 10% annual return could result in over $1.1 million, contrasting with the depreciating value of car payments.
"If you took the $528 a month, I'm not even going to look at the benefits you're going to get from not having such expensive insurance or not having such expensive premium gas. But if you took that $528 a month and you invested this money into the stock market, maybe you just put it into an ETF giving exposure to the total stock market, you get a 10% return. You do this for 30 years, you're going to have an investment fund worth over 1.1 million."
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The home one lives in is an expense requiring continuous payments, unlike an income-generating asset.
"And when you buy this home to live in, you have to pay money to live in here. How do you make money to live here? Well, you got to go to work to continue making payments here."
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For a 30-year fixed-rate mortgage, over half of the payments made during the first 14 years primarily go towards interest for the bank.
"So, you're going to work to make the payments here. And then on your mortgage, if you get a 30-year fixed rate mortgage, the first half of your mortgage, actually, the first 14 years of your mortgage, more than half of your monthly payment is going directly into your banker's pocket with interest."
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Time is an unchangeable factor in wealth building; therefore, starting investments sooner rather than later is crucial for long-term growth.
"You cannot change time but you can change the return. You can change the dollars. But the one factor you cannot change is time. And this is why it becomes incredibly important for you to start investing sooner rather than later."
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By law, REITs must distribute 90% of their taxable income (derived from rent) to shareholders as dividends.
"REITs are required by law to pay out 90% of their taxable income or their rent to you shareholders through dividends."
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The speaker prioritizes cash flow producing investments, suggesting it's a personal preference but emphasizing the need to identify the right investment strategy for oneself.
"For me, I like cash flow. That's why the majority of my investments are cash flow producing and some are not. But you got to figure out what are the right investments for you."
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For most individuals, investing in funds like index funds or ETFs is a more prudent approach than directly purchasing individual stocks.
"This is why most people shouldn't be going out and buying stocks when the next best thing is buying something like a fund, potentially an index fund or an ETF."
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Continuously buying during market downturns (crashes) presents an opportunity to acquire assets at discounted prices.
"If the market's booming, you keep buying. If the market's crashing, you keep buying. The only change that you'd make is maybe buy even more when the market is crashing because it gives you the opportunity to buy even more at a discounted price."
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The speaker prefers cash flow producing investments (stocks and real estate) because they provide immediate income.
"The bulk of my stock market investments pay me with cash flow. The bulk of my real estate investments pay me with cash flow. I like cash flow just because it gives me cash in my hand today."
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It is recommended to maintain savings equivalent to 3 to 12 months of expenses.
"That means you want to have somewhere between 3 months and 12 months worth of expenses saved up."
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Avoid using debt to purchase items or assets that do not generate income.
"from now on, if it doesn't put any money in your pocket, don't use debt to buy it."
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There is no upper limit to an individual's earning potential.
"There's no limit to how much you can earn."
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Reinvesting dividend income to purchase more cash-flow-producing assets creates a compounding effect, where income generates more income.
"Because now, not only are you contributing more money to buy more of this cash flow, but you're using your cash flow to buy more cash flow."
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Achieving $60,000 annual dividend income can be reduced from $2 million to $500,000 if the company's stock price and dividends double twice over the investment period, resulting in a 12% yield.
"Now, if the company you invest and follows this type of growth where they can double twice and the dividend value doubles twice over the course of you holding it, now you don't need to invest $2 million to get this $60,000 a year. You need to invest half a million dollar, $500,000 because now if you invest $500,000 at this price and the dividends go up to 12%. Now this 12% return on $500,000 worth of invested cash is going to give you $60,000 a year."
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ETFs like VOO and SPY provide exposure to the S&P 500, which comprises the 500 largest publicly traded companies in the US.
"So, the S&P 500 is just the largest 500 companies in the United States that trade on the stock market. So, if you are a company and you are one of the biggest 500 companies on the stock market, well then you are going to fall into the S&P 500. So, this is literally just an index or a group of the biggest 500 companies on the stock market. A couple ETFs that will give you exposure to the S&P 500 are V and SPY."
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Total stock market ETFs, like VTI, offer investment in the entire US stock market, including large, mid, and small-cap companies.
"So, a total stock market ETF gives you exposure to the entire stock market. Previously, we talked about the S&P 500 index, which gives you exposure to the 500 biggest companies in the stock market. Something like VTI will give you exposure to the entire stock market with big companies, medium-sized companies, and smallsized companies. So now you're literally just investing your money in the stock market. And if the stock market goes up, your ETF should go up. If the stock market goes down, your ETF in general should go down."
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REITs are legally obligated to distribute 90% of their taxable income (primarily from rent) to shareholders as dividends.
"REITs are required by law to pay out 90% of their taxable income or their profits to their shareholders, people like you, through dividends. And so, a REIT's income comes through rental income because these REITs own these rental properties, these investment properties, and they make money from rent."
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ETFs, like VO, offer more trading flexibility than index funds, allowing for daily trading at any time the market is open and without minimum investment requirements, unlike traditional index funds which trade once a day and may have minimums.
"But unlike an index fund, you can buy and sell shares of VO every single day whenever you want when the market is open. Remember, with the Vanguard index fund, you had a $3,000 minimum investment, and those transactions only happen once a day. With VO, you don't have a minimum investment. All you have to do is buy one share of this ticker symbol, and then you can buy or sell VO whenever you want throughout the day."
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Index funds offer automatic investing and withdrawal capabilities, while ETFs typically require a brokerage service to facilitate automated investing.
"However, the index fund allows you to automatically invest or withdraw your money versus this ETF does not. So, if you invest your money through Vanguard, you can automatically reinvest more money every single month through Vanguard versus with this ETF, you cannot do that. So, if you're looking for a passive way to invest your money, that index fund gives you the benefit because now your money can automatically be invested every single month without you having to do anything versus you can't do that with an ETF unless you're using a brokerage that can passively invest your money for you."
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Historically, the stock market and economy trend upwards over the long term, despite short-term downturns or crashes, provided the economy continues to grow.
"History has showed us that the stock market in the economy always goes up. That doesn't mean it will always go straight up. Sometimes it will come down, sometimes it will crash, and sometimes it will correct. But over the long run, it will continue to go up as long as the economy keeps growing."
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Investing a typical car payment ($528/month) in the stock market at a 10% annual return for 30 years could result in over $1.1 million, demonstrating the wealth-building potential lost to car financing.
"If you took the $528 a month, I'm not even going to look at the benefits you're going to get from not having such expensive insurance or not having such expensive premium gas. But if you took that $528 a month and you invested this money into the stock market, maybe you just put it into an ETF giving exposure to the total stock market, you get a 10% return. You do this for 30 years, you're going to have an investment fund worth over 1.1 million."
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A significant portion of early mortgage payments, particularly in the first 14 years of a 30-year fixed-rate mortgage, goes towards interest for the bank due to front-loaded loan structures.
"So, you're going to work to make the payments here. You're the one that's working to pay down the mortgage. And then on your mortgage, if you get a 30-year fixed rate mortgage, the first half of your mortgage, actually, the first 14 years of your mortgage, more than half of your monthly payment is going directly into your banker's pocket with interest. Because your mortgages are front-loadorded, your banks want to get paid before you get paid."
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Common paths to wealth include starting or acquiring businesses, investing in stocks, and investing in rental properties.
"Wealthy people become wealthy because they build a business or because they buy a business or because they invest in stocks or because they invest in rental properties."
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Profitable real estate investment involves rental income covering all expenses (property taxes, insurance, maintenance, management, vacancy, debt) and still providing a profit.
"So now the way it works is you're going to go out and you're going to buy this property and then you're going to rent it out to somebody else and then somebody that's supposed to be an arrow, somebody is going to come in and live in this property and they're going to pay you rent. Now, if you do this the right way, this rent should cover all of your expenses. That includes your property taxes, your insurance, your maintenance, your management fees and cover your vacancy costs and cover any debt that you might have and then put some money in your pocket."
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Maintaining a savings cushion of 3 to 12 months of expenses is recommended, with the specific amount depending on individual financial circumstances and risk tolerance.
"That means you want to have somewhere between 3 months and 12 months worth of expenses saved up. Now, I know this is a big range and the reason why it's a big range is because, well, it depends on where you are in life."
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Reinvesting dividend income is a powerful wealth-building strategy, particularly for cash flow investors, as it uses existing cash flow to acquire more cash flow generating assets, creating a compounding effect.
"Now, you might think, but what if I take this money that I get from my dividend and I reinvest it back into the company or I reinvest it back into the fund, which is actually a really good strategy when it comes to building wealth, especially as a cash flow investor. Because now, not only are you contributing more money to buy more of this cash flow, but you're using your cash flow to buy more cash flow."
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