Episode 08 – Getting started with Dividend Growth Investing
Hello and welcome to Episode 8 of the Financial Independence Europe podcast! Today I (Araminta) had the pleasure of interviewing my co-host Alvar, someone who has quite a lot to say on dividend growth investing. It was a lot of fun interviewing him in my room in Edinburgh – we’re still getting the hang of this and let’s just say poor Alvar had a lot of editing to do.
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Anyway, without further ado… let’s get to it!
Our co-host Alvar
Alvar is from the Netherlands, is 25 years old and currently lives in Edinburgh, Scotland with his girlfriend. He has a day job, but the real money he makes comes from investing, researching and putting his money in the right places. Hence, a FI nerd. I met him at a FI meetup in Edinburgh and we’ve been working together ever since. An awesome guy.
He swears by dividends and has been investing since he was 18; a proper dividend nerd.
Wait… what is dividend growth investing?
Dividends: A company makes a profit. It decides to share the profit to its shareholders to keep them coming. Every month/quarter/year a shareholder gets a tiny part of their profit, aka a dividend .
Dividend growth investing: What do you do with those dividends? Either you keep them for yourself, or you re invest them into the company and buy more shares. Over the years, this accumulates and grows over time. Magic.
Not only that, but many companies increase their dividends over the years, meaning double growth.
Sounds a bit like passive income…
Yes, it kind of is passive income. But Alvar reminds us that dividend investing does require research and some adjustments from time to time.
You need to know how to pick the right companies and be willing to put 1-2 hours a month into re-adjusting your portfolio and doing more research. It does take a while to get the hang of it but once you find the good ones, you really do get some sweet free money over the years.
So why should I do it?
Alvar prefers dividend growth investing to index funds. Here are a few reasons why:
- You get cash every single year
- You can use the income however you wish
- It’s good to control your own investments
- You don’t have to sell the shares (and maybe not at the right time) to pocket the money.
Of course, I then had to ask him what happens if the market crashes?
Alvar says you need to have a solid strategy. This means investing in stable companies such as supermarkets and energy providers that will keep paying dividends over the years. Don’t put all your eggs in one basket and have a portfolio of 15-20 companies from different industries. Alvar also adds an assumption that a couple of companies will go bankrupt every 10 years.
I love index funds, and so I challenged Alvar as to why he really thought dividend investing was a better strategy. But he said something interesting:
Index funds are overvalued and overhyped.
Alvar believes they will go wrong at one point and are less predictable the more people get into it. What do you think? (there is a comment section below ;))
How to use dividends to reach FI
Alvar says dividend investing won’t get you to FI faster, but it’s a more stable and predictable way of getting there. This is simply because you don’t have to wait at a certain point – which may be the wrong one – to sell. You just keep accumulating over the years. Nice.
If you really want to get into timing the market (we’re not financial advisors!) you can do as Alvar said: wait for a crash and buy everything at an undervalued price. Alvar did this in 2016 when Brexit was announced.
How do I get started?
Alvar very helpfully put out a step by step process to getting started:
- Read up on the core principles of dividend investing (aka do your research – great resources below)
- Find out how you’ll get paid and how much tax you’re paying
- Pick a company using these kinds of metrics:
- Pay out ratios
- Dividend yields
- Dividend track records
- How long the company has been paying dividends
- How much the dividend payout has grown
- Put a small amount into a company just to try
- Add monthly contributions
A great guide, but I really wanted to hear how Alvar did it himself, getting to the nitty gritty details.
He got started in 2012/2013 doing a bit of research. He looked into the company Ahold – a Dutch supermarket chain. He liked that it was a stable supermarket, and started investing using the broker Degiro. It started off with a 3% dividend yield and every year he invested more to buy more shares and get more dividends. How now gets a 9% yield on his initial deposit and pays 15% tax in the Netherlands. A good story.
We also went on to talk about the importance of having the right philosophy when approaching anything to do with money. I found it inspiring and well put.
Top takeaways
A very actionable episode with my co-host Alvar on dividend growth investing. We talk about dividend investing (duh), how to them to reach FI and how to get started now.
The important stuff:
- Dividend growth investing could be a safer strategy than index fund investing
- Yearly dividends are a great way to reach FI
- Investing in the right companies does require research and a bit of time
- Index funds are overvalued and overhyped
- It’s pretty easy to get started
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8 thoughts on “Episode 08 – Getting started with Dividend Growth Investing”
I’ve got a few things to add.
1. Remember you can’t take a dividend for granted. Tesco, the UK supermarket, was a reliable dividend payer. Until it had an accounting scandal. And then it wasn’t so reliable all of a sudden.
2. Paying a dividend is just one thing a company can do with its profits. Another thing is investing its profits back in the business. A great business with a high return on capital won’t necessarily pay a dividend.
3. If you really want to chase dividend income, you don’t have to stock pick yourself. There are funds, both active and passive, that aim to pay out a decent amount of income. Of course, doing it yourself is cheaper.
4. Most money still goes into active funds, rather than index funds. It’s really active investing that’s setting prices.
Hi Luke,
Thank you for listening to the show and your thoughtful comments.
1. I definitely agree with that and that’s also where portfolio management comes in. Some companies will go bankrupt or cut their dividend that is unavoidable and not expecting it would be ignorant. Supermarket chains like Tesco and Ahold both had scandals and might even go bankrupt but within the industries, many solid dividend payers can be found for example Walmart and Target.
2. Dividend growth investing is also just one of the strategies I employ and am at the moment also invested in high growth companies like the FANG stocks
3. There are indeed solid ETF’s out there but I don’t like them due to the expense ratios and often when a company is going south it takes a while for the ETF to be adjusted and no longer purchase the company.
4. That’s correct but the general trend is moving more toward index investing and things like black swan events or Brexit can be a good moment to buy a company at a more attractive price.
Thanks,
Alvar
Great podcast!
Could you also enable a direct downloading option? I prefer downloading the episodes and listen to them later instead of streaming.
Thanks and keep on! 🙂
Hi Martin,
thanks! Glad you like it! You can download every episode. You can find the link for example when you click on share icon within the web player of every episode. Where would you expect to get the download link from?
Direct link for this episode: https://simplecast.com/s/10f2f870
Most people use a dedicated podcasting app where you can configure that episodes are downloaded for later consumption when you enter your wifi to save mobile bandwidth.
Many podcast sites have the option of downloading the mp3 directly. I tried it with the share icon and the link you posted, but it only downloads a .html file?
Yes, I have the same probllem too, I guess first episodes were available to download directly to .mp3 if I’m not mistaken 🙂 Would be great if it comes back!
Should be back now. Can you check again?