This question came in from Reddit:
I'm new to this whole investing thing (20years old) but from what I'm understanding and correct me if I'm wrong but it sounds like dividends are only worth it when you have a lot of money to invest and close to or are already retired?
What would be a good amount of capital to start seeing some good returns in dividends?
For someone like me my goal at-least for dividends would be to at-least cover my cost of rent in the future which for me would be around 1-2k a month.
Let's break this down and start in the middle...
What would be a good amount of capital to start seeing some good returns in dividends?
All amounts of capital will get the same returns. Return are measured as a percentage of your investment. If you have a modest amount to invest, you'll get the same returns as someone with tons of money to invest.
Which leads to the last part of this person's question:
For someone like me my goal at-least for dividends would be to at-least cover my cost of rent in the future which for me would be around 1-2k a month.
If you have a goal in mind, you have to just work backwards. If we assume you can average around 3% in dividends across a portfolio of dividend aristocrats then you need to invest an amount, 3% of which gets you to your (annual) goal.
To get to $1,000 a month, you're looking for $12,000/year. 3% of (amount invested) => $12,000, means you need amount invested of $400,000. That's a large portfolio, not out of reach over time, but someone just getting started isn't likely getting started with nearly half-a-million dollars!
You certainly could find dividend stocks or funds that pay higher than 3% on average, but then you're likely trading that higher dividend for equity growth or for more risk.
This brings us to the first part of the question:
I'm new to this whole investing thing (20years old) but from what I'm understanding and correct me if I'm wrong but it sounds like dividends are only worth it when you have a lot of money to invest and close to or are already retired?
"Dividends are only worth it if you have a lot of money to invest" <– Again, your return is going to be the same no matter how much you have to invest. No one gets rich overnight.
Dividends are fun; so they might keep people going who would otherwise check out of investing due to volatility (watching their portfolio going up-and-down for seemingly no good reason).
Reinvesting dividends is another way to compound growth, here's an example of how big an impact reinvesting dividends can have using Proctor & Gamble.
I'd argue that dividend investing is good for younger people because you have a lot of time for compounding growth to work. If you invest in the dividend aristocrats, the dividends themselves grow, and the amount of dividends you get compounds with reinvesting. There's compound growth all over the place. Looking at the P&G example, you'd quadruple your investment in 12 years even with modest investing dollars. And, that's a good result!
To set expectations... imagine that this 20 year old has $10,000 to invest. Though, I don't think that qualifies as a small amount (his original question). And, let's say he can get a GREAT return of 10% a year, year-after-year (dividends, no dividends, don't care for the moment). That $10,000 will earn $1,000. Year two, if that original $1,000 were reinvested (ignore taxes for the moment), you'd get $1,100. My point is, that's very far from the $12,000-$24,000 the questioner needs each year to cover rent, even assuming great investing results.
I imagine the person asking the question is not thinking realistically based on the way the question was phrased.
I happen to love dividends, dividend growth, and dividend reinvesting. I think it keeps people motivated to stick to their plan, and I believe that it's a fun way to invest – no matter your age or the amount you have to invest. It's not the only way to invest, but it's a great way to get started and by doing so, to learn more about the stock market and how it works.
And of course, if you only have a small amount to invest, don't forget Stockpile. It's a great way to invest small amounts and focus on dividend reinvesting. (That's not an affiliate link, I don't get anything for recommending Stockpile.)
