Marc Litchenfeld tells me that John D. Rockefeller once said that what gave him the “greatest joy” was seeing dividends flowing into his bank accounts.
Dividends are income – i.e., cash flow you’ve earned from investments.
Rockefeller was probably the richest man that ever lived. His dividend income was enormous. Yet I hope he was exaggerating to make a point. How depressing to be filthy rich and value money as your greatest pleasure. That’s a gray, lifeless limbo of existence. Scrooge McDuck territory.
Still, I can imagine situations where income matters a lot.
Let’s say you are a single parent making minimum wage, about $1,600 a month. Your apartment – a beat-up one-bedroom condo in Miami – costs you $1,100. An extra $100 to $400 a month? Yeah. That would be sweet.
Or let’s say you are retired. Between your pension and your and your spouse’s Social Security, you have $4,200 a month. Your monthly nut is $4,100, leaving you a measly $100 for fun and/or emergencies. What if you could bring in another $600 to $1,600 a month? Would that help?
Most financial brokers and advisors focus on “rate of return” when they talk to their clients about investments. Not because they care about their clients but because they know that’s what their clients want.
They know that their best clients (usually retirees with significant stock and bond accounts) want high returns because, for them, a return of 12% rather than 4% means the difference between prime rib and hamburger.
They also know that the easiest way to sell their clients on big returns is with growth stocks (even penny stocks), junk bonds, short selling, stock options (e.g., buying puts), and other forms of speculation (yes, including bitcoins).
They know the financial media will devote 90% of its coverage to those investments so they don’t have to push too hard to get you into them. They merely have to provide you with the opportunity to chase returns and make you sign wavers (that you don’t bother to read and don’t take seriously) when you are investing in a way that is clearly idiotic.
What the financial community should be doing is telling you some basic truths.
You need to know that every asset class has its natural, historic rate of return. Trying to get much more than that is a sure way to get poorer.
Growth stocks should have a place in your investment portfolio, as should speculative investments. But growth stocks should have a small place. And speculative investments should have a tiny place or no place at all!
The smart move is to invest in big, proven companies that have nearly zero chance of going out of business and a long history of providing dividend income to their shareholders.
I set up such a portfolio about five years ago. It was meant to be the sort of portfolio Warren Buffett might have established if he had been starting out (rather than as head of the huge and hugely successful Berkshire Hathaway).
My portfolio has done pretty well, if I do say so myself. Of dozens of portfolios tracked by a service I trust, it ranks number two in that time period with an overall return of something like 58%.
More about that another time. The main point I want to make here is that I recognize how important income is to retirees. And that’s one of the reasons I believe that when you invest in anything you should invest for the income.
Forget about huge promises for the future. Forget about the amazing contract a company just signed. Forget about how it’s going to change the world. Ask to see the dividends the company’s stock has produced since its inception. That is what matters most. That is what will most likely give you an income when you need it.
I’ll be talking lots more about income in the future. For now, if you think you might like to invest in income-producing stocks (stocks that give dividends), here are three terms that you should know (courtesy of InvestingAnswers.com):
Dividend Declaration Date: The date on which a company’s board of directors declares that a dividend will be paid to shareholders. The board determines the amount of the dividend, as well as when it is to be paid.
Dividend Record Date: The date on which a company reviews its books to determine its “shareholders of record.” If you hold the company’s stock on this date, you will receive the dividend.
Ex-Dividend Date: The stock exchanges or the National Association of Securities Dealers (NASD) assign the ex-dividend date. It is typically two business days prior to the record date. If you buy a stock before the ex-dividend date, you receive the dividend. If you buy the stock on or after the ex-dividend date, you don’t. On the ex-dividend date, a firm’s share price usually declines to reflect the amount of the dividend. Let’s say a stock is trading at $100 and pays a quarterly dividend of $3 per share. All other things being equal, the stock would open on the ex-dividend date at $97.
