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.
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.
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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