I’m 23. Just got out of college and looking to invest a little bit. My research indicates I’m probably best off buying index funds. Is that correct?
Thanks for writing. It’s always fantastic to hear from readers, especially one as young and new as yourself.
You have a great question.
However, it’s not one that can be answered simply with a straight “yes” or “no”.
The answer depends on who you are, what you want out of your investments, and what you’re willing to put into it.
If you want to invest a predetermined amount of money every month and not think twice about anything related to investing, I would say index funds are definitely the right way to go.
And if you go down that road, I’d say you should just stick with the S&P 500.
It’s comprised of the ~500 largest companies in the US. The S&P 500 has been one of the best-performing indexes for decades.
Rachel, you’d likely do just fine over the long run by saving what you can and systematically putting it into the S&P 500, month in and month out.
However, I will say that there are investment strategies out there that can give you market-like, if not market-beating, performance along with more income from your investments.
Dividend growth investing is one such strategy.
Fellow contributor Dave Van Knapp put together his excellent Dividend Growth Investing Lessons to explain what this strategy is, why it’s so powerful, and how to successfully execute it.
Suffice to say, it takes an amazing business to be able to pay out growing dividends for years on end.
You can’t run a poor business and simultaneously pay out rising cash payments to your shareholders. It’s just not possible. Not for long, anyway.
Thus, dividend growth investing has a way of filtering out poor businesses, allowing the “crème de la crème” to rise to the top.
And it allowed me to retire in my early 30s, as I lay out in my Early Retirement Blueprint.
I built the FIRE Fund using the tenets of dividend growth investing.
That’s my real-money stock portfolio.
It generates the five-figure passive dividend income I currently live off of.
However, instead of just blindly buying an index fund, I put my hard-earned savings into high-quality dividend growth stocks.
I’m talking about stocks like those you’ll find on the Dividend Champions, Contenders, and Challengers list.
These are often world-class enterprises making a ton of money – and sharing a good chunk of that with their shareholders, via growing dividends.
Routinely buying, then holding, these stocks had the effect of producing a much higher yield from my investments.
Instead of collecting ~1.8% from the S&P 500, I’m getting a yield of ~3.4% on my portfolio.
That’s almost twice as high!
And it makes a big difference.
I don’t have to sell my stocks to earn enough investment income to live off of.
I can instead just passively collect my growing dividends, keep the “golden geese” that lay these “golden eggs”, and go about my life.
I’m recommending that you do plenty of research on this subject, Rachel.
But I would be careful in regard to this ongoing narrative that implies that index investing is the only way you can achieve significant wealth and passive income, and even financial independence.
If you can isolate the highest-quality stocks in an index, partially evidenced by their willingness and wherewithal to pay growing dividends, you have a great chance at doing better than said index.
All while potentially collecting much more income.
It’s ultimately up to you, Rachel, to invest in a way that best suits you.
If you decide to try out dividend growth investing, we’ve got you covered with some great long-term investment ideas.
I personally share a compelling long-term dividend growth stock idea every Sunday.
I do that via the Undervalued Dividend Growth Stock of the Week series.
Every stock undergoes a rigorous analysis and valuation. And only stocks from the aforementioned CCC list are considered.
Rachel, you’re in a great spot.
You’re only 23 years old. To even be thinking about this stuff is wonderful. You’re years ahead of most people.
No matter which way you decide to invest, I’ll tell you the most important thing of all.
Make sure to start today.
I wish you luck and success.
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.