Dividend Investing – Back to Basics

A lot has been written about Dividend Investing (DI) and Dividend Growth Investing (DGI). However, for an absolute beginner, when he starts reading about DI/DGI, he is like a dear in front of the head lights and does not know what it is all about and what to do. I am starting a series of articles that will explain about the whole process of Dividend Investing: what it is and how to begin your financially independent (FI) journey.

I felt that there is a need to connect DI with your own life that you live and only then, it will start to make a better sense by providing living and breathing examples to a beginner who just started his journey. Only then, a beginner can really make a connection and more importantly make thoughtful decisions as espoused by Benjamin Graham, Warren Buffet, John Bogle, and other investing legends.

This article starts with your daily life style that an absolute beginner can relate to and understand. Before looking into what Dividend Investing is all about, I will present you with an inventory of our various activities that you perform every hour, every day, every week, every month, every quarter, every year in and every year out without fail, which at the most fundamental level are as follows:

  • Air: You need to breathe in air and without it you can’t live even for a second. This air is FREE. No company or government has a monopoly on this. Hence, there are no real private businesses around this FREE supply source. Hence, no one makes any profits out of it (I am not talking about Beijing Air, where some smart entrepreneur could still think of ways to make money 🙂 like auctioning a jar of fresh air from Alps for $86 bucks!).
  • Get to Work:  In order to getting to your school or work, you need to do brush, bath, shower, shampoo, dress and beautify yourself in order to impress someone 😉 All these satisfying elaborate activities require touching many products. What products come to mind and who makes them: Colgate, Johnson & Johnson, Proctor and Gamble, Kimberly-Clark, etc. I call this as the most important observation that can make you a smart investor and giving you a 6th sense. This can serve you much better than reading several Wall Street analysts’ reports, watching top-notch TV honchos and reading hedge funds recommendations. You can extend these sharp observation skills to other businesses around yourself while driving or where ever you visit and see who is attracting droves of customers.
  • Food: In order to pump in some calories into your human body, you need to at-least drink water or drinks and eat some sort of food. Who makes these products: Coca-Cola, Nestle, Hersey, Star Bucks, McDonald, Chipotle, Pepsi, …. you can fill in your favorite. Point of this exercise is to observe the products or services that you and others will need on an on-going daily basis and what companies provide those necessary products. These companies must be dominant players and in some cases almost have virtual monopoly and are said to have a “wide moat” around them as Warren Buffet calls. It will be very difficult for new competitors to come in and knock them down.

You can continue and expand this exercise to your other daily needs like Energy, Shelter, Fun/Entertainment, Health, Defense, Finance, and many other areas, some even beyond my imagination like golden curtains in bathroom 🙂

You toil hard from 9 to 5 in office to make money, $$$$$$$$… and you use that money to purchase necessary products and services. Now, think about it: you literally drain your life, blood and energy on them and it makes perfect sense to get some money back from these companies, but, how. This is where Dividend Investing (DI) comes into play. You need to own these very companies (investing). Once you do, these companies will reward you with a form of cash back (dividend) on a regular basis (monthly or quarterly) and isn’t getting some money back awesome! This is the crux of Dividend Investing (DI), my friends.

When you purchase a share in these profit making enterprises, you are really buying a very-very small slice of the big pie (unless you have an elephant gun like Warren, to eat big slices 🙂 of pies). But, that’s okay; our pie will grow with more money invested in these companies as time goes by. They will shower you with dividends and that buy more shares (ownership) and this keeps growing resulting into a big snow ball effect, where rolling snow from hill gathers more snow, resulting into a bigger and bigger ball, and when the money ball becomes so big that all of your expenses are covered by the dividends, you have achieved Financial Independence (FI) and freedom to live a life that you always wanted. You have free time and do things that you really love to do, travel around world, learn about amazing new cultures and soak in the wonders of nature or simply sit back and relax! Life should be moments of pleasure and filled with activities that you have great passion about. This is what I call enriched life filled with happiness.

All the best on your FI journey! Thanks for reading.

Full Disclosure; I am long on securities for companies mentioned in this article.

6 thoughts on “Dividend Investing – Back to Basics

    1. Brian,

      Thanks for stopping by!

      Absolutely. Passive Dividend Income empowers you like no other thing and frees from the shackles of 9 to 5 job. It is a wonderful feeling when you no longer have to think about a paycheck to maintain your life-style and passive income does the rest of work for you.

      Best wishes,

  1. Nice post PIM. I think this is why so many of us dividend growth investors have portfolios that are heavily weighted in the consumer staples sector. It makes perfect sense to own companies that produce products that we all need on a daily basis. Makes for a business with a reliable cash flow that can pay us investors dividends on a regular basis.

    Best wishes,
    SFZ

    1. Hi SFZ,

      Thanks for your nice comment. Appreciate it very much.

      Sure. Consumer Staples and Discretionary along with Energy companies like BP, CVX, XOM, COP, PSX along with Utilities & REITs comprise a rich source of passive dividend income. Also, as interest rates increase, financial companies may be the dark horse.

      Best wishes,

  2. Hi PIM,

    I also liked this article. It was easy to understand especially for a newbie like me who just started learning about investing .

    All the best.

  3. Kathy,

    Thanks for your nice comments. I am glad that you liked it and found this post useful.I am striving to help beginner investor who want to start their FI Journey.

    Best wishes,

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