The Importance of Calculating Your Dividend Income

Most people who call themselves “investors” really aren’t.

The average “investor” is really a trader. He buys a stock with the hope that at some point in the future, he’ll find someone who’ll buy it for more than he paid. He’s trying to time the market.

[ad#Google Adsense 336×280-IA]”Buy low and sell high,” right?

More often, however, people can’t stand the uncertainty.

Watching the market flip and flop all over the place leads to bad decisions. People buy high and sell low.

Ultimately, it’s a lot of stress and research for an uncertain payoff.

But there’s an easier way…

Many investors overlook the fact that your true wealth is your income.

I’ll bet you have some idea of the total balance of your brokerage account – even without looking it up. But you probably wouldn’t be able to quote the annual dividends that your portfolio generates.

A dividend is money a company pays its shareholders. Every quarter, the company counts its earnings and pays out some portion to its owners (the shareholders). Essentially, it’s your cut of the profits.

Ignoring dividends is a blind spot many investors have, and it’s a mistake. You shouldn’t measure your wealth by the balance of your bank account, but by the income it generates.

Income is what you live on. Income is what gives you the freedom to enjoy your days, take vacations, or provide for your family and others.

When you buy 100 shares of a stock that pays $1 a year in dividends, you’ve just set yourself up to earn $100 a year in income. With a little bit of investing acumen, that income stream should rise.

And a dividend is more than just an income stream… Dividends are vital to the overall returns of your portfolio. According to studies, dividends have accounted for about 43% of the performance of stocks in the S&P 500 since 1926.

That means if stocks return 7% a year, about 3% of that is dividends. That makes for a big chunk of returns.

That difference grows over time (an effect called “compounding“). An investor who collected and reinvested dividends from 1940 to today would have earned 10 times as much as an investor who collected the capital gains on stocks alone.

Simply put, paying dividends is exactly what the stock market is about.

The future growth potential matters. The company’s assets and resources matter, too.

But… if a stock doesn’t provide a stream of income, then what’s the point?

Remember, each share of stock represents a tiny ownership stake in a business. So buying shares of a company makes you a part owner… a kind of partner. And your dividend check is your share of the profits.

So you’ll likely become a lot more successful… and richer… as an investor by asking a simple question: “What does the stock pay to shareholders (the owners) each year?”

After all, a dividend can’t be faked. Companies can employ a range of accounting tricks to beef up earnings. They can come up with new grand “strategic plans” to paint a bright picture for the company’s future. At times, some even engage in outright fraud.

But a dividend comes as real cash, straight from a real bank account. It can’t be faked, cajoled, or conjured. Only companies with sound financial footing and real profits can pay dividends. By focusing on dividends, you’ll immediately ignore many of the junk stocks out there in the market.

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig


Source: Daily Wealth