Dear DTA,
Hi. I just inherited some money. Looking to invest it, but I’m not sure where to start. The stuff going on right now makes me think this is a bad time? Not sure what to do.
-Angel B.
Hi, Angel.
It’s always great to hear from readers. Thank you for taking the time to write in.
It’s heartening to know that you’re taking the time to step back, educate yourself, and really think through your options with this inheritance.
Too many people will act without thought when they come upon a large sum of money.
They immediately start buying things, which is a bad idea.
The best thing you can do is to formulate a long-term plan that best works for your long-term financial goals.
Then act upon that plan when you feel fully ready.
It’s easy to get caught up in the here and now, especially with COVID-19 dominating the 24-hour news cycle.
But you should be acting on plans that are designed for decades of your life.
I don’t know how old you are, how much money we’re talking about, or what your goals are.
But I will say that most investors I’ve ever talked to have a very similar end goal in mind.
That end goal is financial freedom.
I’ve never met a single person who didn’t want some financial freedom in their life.
To have enough money to live life on your terms is a very appealing idea for everyone.
Of course, wanting this financial freedom and actually taking the steps necessary toward attaining it are two totally different things.
However, with an inheritance working as a major financial tailwind for you, the steps you take next could radically change your outcome in life.
I strongly desired financial freedom when I first started saving and investing. So strongly, in fact, I took the actions necessary to attain it.
That was early 2010.
And I went from below broke at 27 years old to financially free at 33 – only six years.
I started with very little money, and I never had a high-paying job.
How did I do this?
I explain how I did it in my Early Retirement Blueprint.
The investment strategy I used is a key aspect of the Blueprint.
That strategy is dividend growth investing.
Fellow contributor Dave Van Knapp put together the Dividend Growth Investing Lessons to explain what this strategy is, why it’s so effective, and how to successfully excute it.
Dividend growth investing essentially advocates buying and holding shares in world-class enterprises that pay reliable and rising cash dividends.
You can find more than 800 US-listed dividend growth stocks on the Dividend Champions, Contenders, and Challengers list.
By investing in high-quality companies that pay growing dividends, I was able to build the FIRE Fund.
That’s my real-money portfolio.
And it generates the five-figure passive dividend income I live off of in my 30s.
It only makes sense to invest in higher-quality companies over lower-quality companies.
And it’s obviously reasonable to expect that high-quality, profitable companies will return some of that profit back to the shareholders.
Shareholders, after all, are the collective owners of publicly-traded companies. They deserve their fair share of the growing profit.
Well, Angel, a growing cash dividend is an excellent initial litmus test of business quality.
Only the best companies in the world can afford to write ever-larger checks for years and years on end.
Best of all, these growing cash dividends can make for a fantastic source of passive income.
That’s because of the durability and growth.
If you’re going to rely on passive income to pay the bills, you want to make sure it’s durable. Decades of dividend raises prove durability.
You also want that passive income to grow at least in line with inflation, to protect your purchasing power.
When you look at the dividend growth rates from many of the highest-quality dividend growth stocks in the world, you’ll find that the dividends are often growing much faster than US inflation.
Now, I didn’t randomly pick stocks off of the CCC list.
No. I was careful to fully analyze and value every single business before I bought its stock.
Regarding that latter part, due largely to COVID-19, a lot of high-quality dividend growth stocks are valued significantly lower today than they were just two months ago.
This has had the effect of increasing yields – price and yield are inversely correlated, all else equal.
Receiving an inheritance at this particular point in time is most fortuitous.
Set up your long-term plan and then act on it as appropriate.
If you decide, after reading through some of the above resources, that dividend growth investing is the best strategy to achieve your goals, make sure to follow my Undervalued Dividend Growth Stock of the Week series.
Every Sunday, I highlight a high-quality dividend growth stock that appears to be undervalued at the time of publication.
Each stock goes through a rigorous analysis and valuation. And I even include valuations from professional equity analysts, which gives you additional perspective on these investment opportunities.
Angel, you’re in a wonderful position over there.
You’ve received some money at an advantageous time.
Honor the gift. Educate yourself. Act in a way that benefits your long-term financial goals.
No matter how you ultimately decide to invest the money, I’ll leave you with my best piece of advice.
Start your process today.
I wish you luck and success.
— Jason Fieber
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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.