How to Use the Power of Dividends for your Benefit

How to use the power of dividends for your benefit? Is this even possible for regular Joes like us? We all have heard the saying, “Don’t work for money, make the money work for you” or “If you don’t find a way to make money while you sleep, you will work until you die.” Quotes like these may sound daunting to a person who works 9-5 daily just to get his salary at the end of the month so that he can pay his bills, make ends meet, and help his family survive – this cycle is what makes a person’ poor’.

Poor people have an income in the form of salary, whereas rich people have their income in the form of dividends, which grows at a greater rate compared to inflation. For salary, you have to sell your time and energy. Whereas in the case of dividends, your time and money work for you. This is one of the reasons why the rich keep getting richer, and the poor always stay where they are – blaming their low-income job and the government for not giving them enough money.

The most important thing you need to know is how to use the power of dividends for your benefit
The most important thing you need to know is how to use the power of dividends for your benefit

Now, I am not saying that having a regular job is bad. It’s just that people need to learn to reap the rewards from the income they’re getting in the form of salary. Having a monthly salary that gets credited directly into your account is great – if you are wise enough to invest the money you are earning and compound it.

The thing with a person doing a regular job is that he spends almost all his money buying liabilities and trying to please himself, things he doesn’t need, things he buys just to feel superior compared to his peers. If you use your income from jobs wisely, it is a great option to mint more money and grow your capital. All this a mental game, your boss, or the government won’t just hand you more money for the work you’re doing. You have to think out of the box and make your money work in your favour.   

Now let’s understand what dividends are how to use the power of dividends for your benefit…

Table of Content…

What are Dividends?

The short and simple answer for this is, when you buy a company’s stock, you become a part owner of that company (0.000_ %, depending on the amount you’ve invested). This means when you hold that stock, you become eligible for your part of the profit – If that company performs really well and earns a lot of profit, it is very beneficial because those profits will eventually reach your pocket. The company’s board, which consists of many members, decides whether those profits should be given in the form of dividends or be retained.

Why do Companies pay Dividends?

A company pays dividend mainly to please its shareholders in return for providing them capital to do various tasks within the company. Second, If a company is large, mature and stable, and doesn’t have much scope for growth, the board members usually opt for dividends. The interesting thing here is that some stable companies, which have growing revenue, already declare dividends for the forthcoming year.

So finally, when a company pays dividends, the amount gets credited directly into your bank account – just like your salary. An important thing to understand here is that there are practically two ways of earning money from stocks – 1. When you buy low and sell high 2. When you invest in stocks and hold them for long-term, and earn through dividends.

Warren Buffett’s Dividend Investments

The easiest and most stress-free way of earning money through the stock market is investing in stocks and holding them for long-term. This is visible when you check the track record of HNWI (High-Net-Worth Individuals) who have held and are still holding stocks for a very long time – they have built their immense wealth mainly by holding onto the stocks.

When we usually talk about the stock market, we generally listen about things like buying the stock and selling it high. In reality you should be focused more towards buying ‘businesses’ rather than stocks. If you look into the history of the 6th richest person in the world (and probably the greatest investor of all time) – Warren Buffett, is a long-time investor. Now let’s take a look at one of the stocks he holds in his portfolio. 

If you look at Warren Buffett’s investment in Coca-Cola and compare it with the CEO of Coca-Cola, an individual who earns the highest salary in the company. You’ll notice that Warren Buffett earns a lot more in the form of dividends than the CEO of that same company, because he was an early investor of Coca-Cola and still holds that stock to this day!

Can we Retire Early Depending Only on Dividends?

Yes, absolutely – but when we talk about retiring, we must know a bitter truth, 95% of the individuals don’t actually think about retirement. For most people, retirement means depending on their offsprings (their salary) – this puts a lot of pressure on the offsprings, and this vicious cycle of surviving through jobs continues. For some people, the rent coming from their real estate investments or Fixed Deposits’ interests acts as a passive income and helps them after retirement. This is a sad truth – because to invest in real estate, you need huge amounts of capital, and no one really talks about investing in stocks as it seems very risky to people. 

Start Early

An important point to note is that, in order to earn a respectable income in the form of dividends, you need massive capital. Unlike real estate, this capital can be accumulated over a span of years by consistently investing into the stock market. The trick is to start early – the earlier you start, greater will be the effect of compounding in the long run. Warren Buffett started investing at the age of 11; he once quoted, “I made my first investment at age eleven. I was wasting my life up until then”. Now, this doesn’t mean that you’re too late to start investing; as the saying goes, “It is never too late.”

It is extremely important to know how to use the power of dividends for your benefit
It is extremely important to know how to use the power of dividends for your benefit

Is it ‘Risky’?

Many people believe that investing in stocks is very risky; I believe NOT investing in stocks is a greater risk – and by this, I am referring to investing in stocks and holding them for long-term. It would be best if you researched stocks that you can buy and never worry about selling them. This may sound complicated to many people; they must be thinking if you don’t sell a stock, how will you earn money from it. I’ve already explained that there are two ways of earning money from the stock market – 1. Capitals gains (buy low, sell high) 2. Dividends (Buy and hold). If you go for the 2nd option, the 1st option works in your favour as well, as you can do both – buy and hold (income through dividends), and then sell high.

Dividends vs Fixed Deposits

If you compare dividends with fixed deposits – you get a particular return from FD at the end of the year. Your capital is just sitting there and pumping out the same amount of cash for you every year. In the long run, the capital loses its value due to inflation, and in most cases, you end up with what you started or slightly higher.

Whereas in the case of dividends, your capital grows along with the dividend you’re getting- your capital beats inflation and at the same time pumps out healthy sweet cash for you. You can also decide to reinvest the money you are being paid in the form of dividends back into the stock; this leads to a snowball effect. At this rate, your capital is growing exponentially. So, eventually, you get dividends based on your growing capital – that, in my opinion, is a win-win situation. 

Alternatives

How to use the power of dividends for your benefit if you’re worried that the company you’ll invest in might not perform well in the long run? In that case, you can create a portfolio consisting of 10-15 stocks, where even if 3-4 stocks turn out to be multibaggers, they will take care of your entire portfolio (depending on the capital allocated to them). And if you’re not sure about your portfolio as well, then you can go for dividend-paying index funds, where you won’t have to research about companies. 

Be Patient

In the end, this whole game is about compounding your capital. Compounding is a long-term game – everyone talks about it, but no one truly harnesses its powers as it requires a lot of patience.

I would like to end it with a quote from Warren Buffett,

The stock market is a device for transferring money from the impatient to the patient.

– Warren Buffett

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Syed Fayzan
Syed Fayzan is currently a student of Chemical Engineering at Mumbai University. He has hosted many communication and public speaking events as he loves to express his views on the importance of financial and soft skills. A lifelong learner, currently in pursuit of financial freedom as he tries to learn and educate others on the topic of financial literacy.
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