When I invest in dividend stocks, I’m now thinking about how many years it will take to get all of my money invested back. This frame of mind helps me plan for the future, as a dividend investor in his 40s. I’m excited to share a few models and an analogy from the real estate development world.
#dividend #stock #investing
Upon editing my video, I noticed a typo on my whiteboard. The Easy Formula should read: 100 / Dividend Yield = Number of Years To Return Capital.
Timestamps:
0:00 INTRODUCTION
0:22 As a younger investor, I was all about dividend growth stocks. I did not have an eye on getting my capital back.
0:55 I’m thinking differently as an older investor. I don’t have as many decades for yield-on-cost to work.
1:30 KEY: I don’t want to invest in stocks that have such a low starting yield that I won’t get back my capital during my lifetime.
2:03 I’m in this for me.
2:27 HELPFUL FORMULA: 100 / Dividend Yield = Number of Years To Return Capital
2:54 It’s a conservative, back-of-envelope analysis assuming no dividend growth and assuming no reinvestment.
3:54 SEGMENT 1: COMMERCIAL REAL ESTATE DEVELOPMENT ANALOGY
4:20 Real Estate Lifecycle Illustration
4:26 Capital is raised and tied up for years.
5:30 Years later, when the construction loan is refinanced to a permanent loan, capital is paid back. Investors get their capital returned! (And, sometimes even more!) This is an interesting analogy for dividend investors to think about.
8:08 Dividend investing is a safer route of capital allocation vs. real estate development, in my very personal opinion.
8:40 Dividend investing doesn’t have a refinance event, but capital comes back a little each year/quarter with the dividend distributions.
9:07 SEGMENT 2: REALTY INCOME (O) DIVIDEND STOCK ANALYSIS
9:16 Check out the pinned comment for a link to my Patreon.
9:38 5.68% starting dividend distribution yield
9:46 Price / AFFO is 13.67, a reasonable valuation in my opinion.
10:00 Dividend growth of 3.03% is sustainable, in my opinion.
10:34 QUESTION: Am I using all of my dividends to pay bills?
11:00 REALTY INCOME (O): Years to get back my investment (it’s about 14-15 years factoring in dividend growth)
12:53 NOTE: If I were reinvesting dividends, my yield-on-cost would go up even more.
13:40 SEGMENT 3: STARBUCKS (SBUX) DIVIDEND STOCK ANALYSIS
13:50 2.23% starting dividend yield
13:56 9.6% dividend CAGR will probably slow to about 8%.
14:17 69% payout ratio
14:24 With higher growth dividend stocks, valuations tend to be higher (as we are seeing here with SBUX)
15:00 It’s looking like 19-20 years to get my capital back in the form of dividends.
15:09 We can see after 30 years, yield-on-cost gets to over 20%, and it beats O from that perspective.
16:23 SEGMENT 4: ANNUITY MODEL COMPARISON (Dividend Stocks Vs. Annuity Mindset)
16:26 What’s an annuity?
17:39 Would I be better off taking net new capital, putting it in a high-yield savings, predicting how many years I have left, and treating it like a self-managed annuity?
18:36 It’s a fun thought question I asked myself. It’s fun to think about these scenarios.
20:05 Please share your thoughts in the comments below!
20:17 DISCLOSURE AND DISCLAIMER
DISCLOSURE: I am long Realty Income (O) and Starbucks (SBUX). I own these stocks in my personal dividend stock portfolio.
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Because the information herein is based on my personal opinion and experience, it should not be considered professional financial investment advice or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional. My thoughts and opinions may also change from time to time as I acquire more knowledge. These are, as discussed above, solely my thoughts and opinions. I reserve the right to delete any comments for any reason (abusive in nature, contain profanity, etc.). Your continued reading/use of my YouTube Channel, blog, email newsletters, whitepapers, Excel files, and other materials constitutes your agreement with and acceptance of this disclaimer.
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Getting all your money back from dividend stocks may seem like a daunting task, but it is entirely possible with the right strategy and a bit of patience. Dividend stocks are a popular investment choice for many individuals looking to generate passive income, but they can also be an excellent way to recoup your initial investment over time.
Here are a few steps to help you get all your money back from dividend stocks:
1. Reinvest Dividends: One of the most effective ways to get all your money back from dividend stocks is to reinvest the dividends you receive. By using the dividends to purchase additional shares of the same stock, you can gradually increase your holdings, leading to larger dividend payments in the future. This process, known as compounding, allows your investment to grow exponentially and eventually recoup your initial capital.
2. Purchase Dividend Reinvestment Plans (DRIPs): Many companies offer dividend reinvestment plans, also known as DRIPs, which allow investors to automatically reinvest their dividends to buy more shares of the company’s stock. This can be an excellent way to steadily increase your holdings over time and ultimately recoup your initial investment.
3. Select High-Yield Dividend Stocks: Some dividend stocks offer higher dividend yields, making it easier to recoup your initial investment in a shorter amount of time. However, it’s essential to research and select reputable companies with a history of consistent dividend payments to ensure a reliable income stream.
4. Diversify Your Portfolio: Diversification is key to a successful investment strategy. By spreading your investments across different sectors and industries, you can reduce risk and increase the likelihood of recouping your initial capital from dividend stocks.
5. Patience Is Key: Getting all your money back from dividend stocks takes time and patience. It’s essential to have a long-term outlook and avoid making impulsive decisions based on short-term market fluctuations. By sticking to your investment plan and staying committed to your goals, you can increase the likelihood of recouping your initial investment.
In conclusion, getting all your money back from dividend stocks is entirely possible with the right approach. By reinvesting dividends, purchasing DRIPs, selecting high-yield dividend stocks, diversifying your portfolio, and exercising patience, you can gradually recoup your initial investment and even generate significant passive income over time. With a disciplined approach and a long-term perspective, dividend stocks can be an excellent way to achieve your financial goals.
IMPORTANT ANNOUNCEMENTS:
Thanks for watching! Please don't forget to "like" and "subscribe". Please let me know in the comments below how you look at "return of capital" from dividend stocks. Is this part of your own dividend investing strategy?
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I really love the commulative cash flow modell! Avoiding dividen cuts is prio 1, then focus on a good combination of starting yield + 5-y-div-cagr!
Have you considered ETF's that buy/write call options like the ones Yieldmax offers? It appears you can get back your capital much sooner than standard dividend stocks.
11 years to get investment back from MO
Great video Ian!
I like to use the annual dividend increases as an offset to the annual inflation rate which helps justify investing in dividend aristocrats
Great video Ian thanks for what you do !
Ticker symbol $Main also pays a monthly dividend and is heavily undervalued. I've been buying for a few months along side $O
I am your 500th!
I am having the same thinking as u, I love this video ian
Great video, always informative, Ian… Thank you… Looking forward to doubling down on dividend stocks in 2024… will be a great year!
You should really look into adding covered calls to your strategy, sell with a delta below 20 sometimes you can double the dividend on an annual basis. super safe and easy….
Great Video!!!!!!
I am in my mid twenties and i follow a Income Factory Light approach. Loosely based on Mr. Stephen Bavaria. I am aware of all the potential downsides of that.
357 likes. 0 dislikes. Thats Ian for ya. WELL DESERVED.
Great video
Does your model ignore price appreciation?
At 61, stock investing is something I have always liked. Of course, until 2008-09 I only invested in mutual funds via my workplace 401k because the commissions on individual stock trades was too high. But that recession taught me that the 401k model is flawed and that perhaps I would do better with dividend stocks. I learned that tax laws favor this strategy and with introduction of fractional share platforms, easier book keeping, tax loss harvesting, reinvesting dividends, increasing cash flow is just math! My knowledge has been hard earned, but not something that most people want to talk about because lot's of average people find it boring and mostly uncomfortable to talk about MONEY! Love your content, keep on keeping on.
Am I reading this right? That the pe for O is 40+??? Why would I in a real estate behemoth, that has a ton of competition and a ton of capex, and trades at a higher pe than another asset light, indispensable company that has real brand power and a formidable moat like visa and which is trading at a 25% discount pe wise??? I just don't get it. And what's all that noise about dividend yields, because as a non resident alien, I get hit an automatic 30% tax on any US derived dividend or interest income, so it doesn't make any sense in going crazy over dividends and in asset-rich reits that need to keep reinvesting their profits to stay in the game and keep their tenant happy and paying rents
Thanks for all your work Ian. You've been an inspiration for me since my early investing days.
When it comes time to refinancing some of these REITs can take a hit. Thoughts? Especially with office vacancies and problems at malls.
Great video and very informative! I’m a younger investor; however, I love knowledge from more experienced investors such as yourself.
Ian, your model is an interesting experiment. I would recommend including the discount rate in your model, and then summing up the present values of the cashflows to get a more accurate picture of your breakeven point. Returning your full principal in 17 years doesn't compensate you for the delayed consumption. In other words, you need to discount the dividend distributions. The cash you receive back in years 15, 16, 17, etc is pretty worthless relative to cash you receive in years 1, 2, 3, etc, especially if your cost of capital is high (e.g. anything above 8-10%, which is pretty common in commercial real estate development where you work). I'm sure you understand all this, I just wanted to post a comment for the benefit of the other viewers 🙂
Hi Ian!thanks for this new prospection on investment as I am also in my 40s. Keep let us know your thinkings!
Dividends got me into investing in the stock market. In my opinion, if you're investing and have income other than dividends, you can live on dividends without selling. That means you can pass this on to your kids to give them a head start in life. I have over $600,000 in my portfolio which include some covered call etfs for dividends and other etf`s for growth; (SCHD, DVY, VIG, SDY & JEPI)
Ian, what do u think about ADC?!
RIP Charlie. Ian is our Charlie now. Nice one Ian. Thanks again.
Now that we have accomplish the goal how to make sure we dont lose it it stressful
I do look at the return of my capital but not through collecting dividends that takes too long i look to cash in enough shares to repay my capital back once my investment has doubled or more this won't work for those that are in the accumulating phase but once you put a good chunk in it is a good ideal to start think about getting your money out what is left is pure profit then