As 2020 was ending I took some time to look at our 401k balances. This was a good year for our investments, all things considered, but one thing surprised me. There was a line item for “dividend’s earned” and it was quite a large number. My wife’s 401k earned more dividends than what I made as a salary in my first year out of college!
This got me thinking about a passive investing strategy that I first read about decades ago. That strategy was about dividend investing and how to build up a passive income strategy. It sounded cool, to have stocks, ETFs, or mutual funds generate $40,000 or $50,000 a year in dividend income! I figured it would be like having another person working for you and giving you their income! I could so easily live off that, I thought!
Companies like Coca-Cola and Exxon are very mature but not sexy like Tesla.
While this sounds great, there are some BIG caveats that made me skip this strategy. First, you need a large sum of money to buy shares in some stock, ETF, or mutual fund. If the assets depreciated, you could lose more than the dividend is worth. Also, dividends are taxable too.
Many times dividend producing stocks are mature companies. This means the days of rapid share price appreciation is over. Companies like Coca-Cola and Exxon are very mature but not sexy like Tesla. You wouldn’t be trend following Coca-Cola!
Still, there are companies out there that can do both. Apple is still growing and generating dividends, so those companies exist!
As I near an early retirement, I can’t help think that now is the time to build a dividend-generating portfolio! It makes sense to rebalance some money into those assets to build up a nest egg faster. Why? I’d rather get the money now than wait for some pie in the sky appreciation promised by some CEO. Look at Tesla, do you believe that it’s going to end well?
What’s the plan? I’m going to buy some dividend ETFs, ones that have a good history of dividend yield and dividend growth. I’ll do this in my 401k and IRA accounts. Then I’ll reinvest the dividends and sit tight. That’s it. I’ll money to it as I go along if I remember too but that’s about as simple as you can get.
Of course, the next question is how do you screen for good ETF’s or stocks? That’s trickier but I’d look for dividend yields between 3 and 6% with low operating fees. An ETF that comes to mind is Vanguard’s High Dividend Yield ETF (VYM).
Note: I’m focusing on ETF’s because they’re diversified and work like a mutual fund. Plus, I can get in and out of them faster than I can with mutual funds. Here’s another one, the iShares International Select Dividend ETF (IDV) ETF that has yield of 6.28% with an expense ratio of 0.48%.
There are many others so I’d have to screen through them but even if I can generate $10,000 a year from dividends, I’d be a happy man.