When most of us hear the word dividends, we think about the easy life, of lying around on the beach while earning an insane amount of money. The cold hard truth is a lot less pretty. Dividends can pay, but unless you've got a lot of money invested, your returns are going to be pretty small. Let's take a cold hard look at dividends as well as some alternatives that can help you achieve your goals in less time.
First off, dividends are a very nice little income. But, it's important to emphasize that "little." If you're planning to retire and live off them, you're going to need to have a very large fund or you're going to have to really cut costs. Look at this way. Let's say you have a divided that returns 2% interest. In order to make a measly $12k a year, you're going to have to invest more than $500k. Not many people can live on $12k a year, no matter where they are from.
While it certainly is possible to find higher paying dividends, the vast majority are in this range. So, unless you're sitting on a $500k nest egg, you're going to need to come up with another way to secure your financial future. One of the best ways to do this is to leverage your debt.
But wait, isn't debt a hideous thing that should be avoided at all costs? Well, in the strictest sense of the term, and using the traditional logic, yes, debt is not a good thing at all. But, let's look at it in a different light. There is such a thing as good debt, debt that actually works for you instead of running you into the ground. It's time to rethink what you already know about debt and get ready to change your perceptions.
Bad debt is debt that you rack up buying inconsequential things. You get used to having nice things and you keep buying, even if you don't really need anything. Before long, you're in over your head and you've got nothing to show for all of that debt. This is the most common kind of debt and the reason that it has earned such a bad reputation.
Now, let's look at good debt. Good debt is money that you spend that will create returns for you. By using debt to make smart investments instead of silly purchases, you can start creating multiple streams of income. This is a lot better than buying stuff that you don't even need. One of the most common types of good debt is a mortgage. Most of us don't have the resources to go out and buy a house with cash, we need to go into debt to get it. But, it's incredibly worthwhile and usually necessary.
Good debt can be leveraged in many different ways. You can use it to purchase investments and bonds that will help you secure your current income. You can use it to take advantage of new opportunities that will create solid streams of income. In a nutshell, good debt works for you by allowing you to start investing in your future.
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Originally posted 2008-12-03 23:11:20. Republished by Blog Post Promoter
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4 comments ↓
I started saving late in live, and I’m putting a lot of faiath in dividends, so your post let some air of of that balloon!
You’re right, of course. I have about $350K invested in dividend paying stocks, and I’m making a bit more than $10K a year in dividends. All of it is reinvested, so the amounts go up a bit every year. Slow, but steady.
But, I also have a financial planner who set me up in the “Smith Maneouvre” — I leveraged my mortgage to invest in high dividend paying mutual funds. I invested a total of $225K with her, and I get $2,400 a month in dividend income which, right now, is partly paying off my mortgage, partly being reivested in other funds.
I don’t know how they do it, but that’s nearly a 10% yearly return.
Once my mortgage is paid off, I’ll be reinvesting those dividends until I’m in the mood to retire.
By the way, I found your block through CASHMONEYLIFE. I’ll come back, but if you’d like to make it easier for me, add a email subscription.
@Lise
Thanks for stopping by.
I will be sure to write about the “Smith Maneouvre” in an upcoming post. I take it you are Canadian, eh?
I have email subscriptions turned on as an option via the rss button at the top, but seeing as you are now the 3rd person to mention that I think I will add an explicit subscribe via email…
The real truth about dividends is that if you find the companies that have always increased it and continue to even in bad times, your initial 2% yield will grow to over 10% as time goes by. Not to forget the power of compounding.
The whole point of dividend investing is to not search for the current high yielding stocks, which spells trouble anyways, but one where the yield is actually around 3-4% with no intention of cuts.
[...] presents The Truth About Dividends | Rich Credit Debt Loan posted at Rich Leverage, saying, “Dividends can pay, but unless you’ve got a lot of money [...]
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