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Overview of your Investing Style
Dividend / Income investors are passive investors that focus on finding fundamentally strong stocks and holding them for the long-term, with an emphasis on collecting dividends or income from their investments. This approach is great for those who need steady cashflow, such as retirees, but generally has lower returns than active growth stock investing.
This strategy is best suited for:
- Time-poor or 'hands-off' investors (e.g. farmers)
- People who want/need ongoing cashflow (such as retirees)
- People who don't mind overall lower returns than growth investing through capital gains in favour of cashflow
Advantages of Dividend / Income Stock Investing
1. Steady Cashflow
This strategy provides investors with steady cashflow, as dividends are usually paid out quarterly or monthly. This makes this approach great for people who need income from their investments (e.g. retirees).
2. Lower Transaction / Brokerage Costs
Dividend / Income investors generally have lower transaction costs than active growth investors, as they don't have to constantly buy and sell stocks. Additionally, the stock selection is generally more straightforward.
3. Low Maintenance
This strategy requires relatively low maintenance compared to active growth investing, with only about 1-2 hours per week required for portfolio upkeep.
4. Lower Volatility
Dividend / Income investing generally has lower volatility than active growth investing, as investors rely on the long-term stability of their holdings rather than short-term market swings.
Disadvantages of Dividend / Income Stock Investing
1. Lower Returns
Overall, dividend / income investors generally have lower returns than active growth stock investors. This is because capital gains from stocks are relatively low compared to dividends/income payments.
2. Capital Requirements
Generally, you should have at least $10,000 ready to invest in order to make this strategy work best for you (i.e. to have a noticeable amount of cashflow generated). Having said that, if you have time to work towards that goal, you can actually start this strategy with about $100 per week – the only downside is it will take longer to generate noticeable cashflow.
3. Lack of Growth Potential
Dividend / Income Investing may produce steady cashflow and lower volatility, but it lacks the growth potential of active growth investing, as capital gains from dividend stocks are generally low.
4. Lack of Stimulation
This strategy can be quite mundane for some investors, as there isn’t much to do once you’ve chosen the stocks and built your portfolio. There is no 'action' or excitement of trading, as buy and sell decisions are typically far less frequent than with active growth investing.
What Dividend / Income Stock Investors Need to Know
Dividend / Income Investors need to stay on top of the fundamentals of their stocks, such as the company's financial statements and news.
As soon as financials no longer meet your criteria, you may need to consider selling or swapping out the stock. You should also note any changes in dividend payments, as they can affect returns over time.
Finally, it’s important to regularly review portfolios to ensure that your cashflow goals are still being met and make any changes as needed.
Tips for Becoming A Successful Dividend / Income Stock Investor
1. Choose Your Stocks Carefully: It’s important that you find the right stocks to invest in. This is done by researching the fundamentals of companies and understanding their competitive advantage, such as price/earnings ratios and dividend yields.
2. Diversify Your Portfolio: It’s important to diversify when investing in Dividend / Income stocks, to ensure that cash flow is steady and reliable over time. This means you should select stocks from different industries, sectors and regions.
3. Monitor Your Stocks Regularly: It’s critical that you stay on top of the financial statements and news of your stocks, as any changes can affect their future dividend payments and other criteria. Make sure to review your portfolio often to ensure that it still meets your goals.
4. Know When To Sell: Sometimes, even the best stocks can become unviable due to changes in their fundamentals. Knowing when to move on from a stock is an important part of Dividend / Income investing.
5. Take A Long-Term View: Dividend / Income investing is ultimately a long-term strategy; while you may experience some short-term fluctuations in cash flow, the key is to focus on long-term growth over many years.
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As a dividend / income investor, you don't need to worry about the markets constantly. However, it's really important to be on top of your stock financials and to understand market trends so you can time your investments correctly.
If you'd like some help with that, we've got you covered with our 1-on-1 Farm Wealth Strategy Session. During this personalised session, we will discuss your current portfolio and financial goals, as well as provide insights on which dividend stocks are performing well and how to diversify your income streams.
Additionally, you'll receive a complimentary 90-day action plan, customised to your specific investment objectives and designed to help you achieve consistent dividend income.
Don't miss out on the opportunity to take control of your financial future. Schedule your FREE 1-on-1 Farm Wealth Strategy Session today, and let us help you build a strong foundation for long-term passive income generation.
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