Dividend income investing – my chat with James, a new convert

January 11, 2013


I always take much pleasure when I see a person changing into a convert to dividend income investing when chatting to them.

In comparison, I get tired of people saying, “The rich get richer, the poor get poorer”. To me, it’s like saying, “Those who exercise get in better shape than those who don’t”. Of course they do – they faced a problem, found a solution, and then got of their sofas and did something about it.

Like getting fit, building financial well-being is most often a case of self-determination. You not only want it, but you also need to do something about it.

If people would invest 20 percent or even ten percent of everything they made in the types of companies we cover at Dividend Income Investor.com they could achieve financial independence over time.

I have many people listen to my passionate pleas on this topic. They nod, they tell me they understand, and they are interested.

Then, sometimes, the “yes, buts” kick in. But, not James.

Dividend income investing – my chat with James

The other day I was at a New Year’s reception. I was introduced to a guy in his early 40ties, called James, who asked me what I did. I told him that I am a dividend income investor and that I had developed a way to value dividend paying companies.

While, although still on his first drink, James looked at me rather confused, therefore I elaborated a bit further as follows,

What I do these day is all about dividend income investing. Basically, I am providing my subscribers with information about high quality undervalued companies that are historically undervalued and that pay a substantial income over time”.

James nodded. “I’ve always been interested in getting more involved in investing in shares,” he said. “But other than my ISA with some investment funds, I really haven’t got into the stock market myself. In fact, if had some extra cash, I’d rather put it into hard assets, like a house or even something tangible like gold.”

“That’s actually where a lot of people get it wrong,” I responded. “Owning shares of a company is a hard asset, and if you chose the right ones, at the right price, they will pay you way more over time than gold or any house, in particularly in this market”.

Confirming that he was a typical house ‘owner’, albeit with an interest-only mortgage James was rather intrigued. “Are you saying shares are better than a house or gold?”

Clearly, here was my chance to gain a convert to dividend income investing, so I continued:

“Absolutely, but only if you pick the right companies, at the right price. Think about it: if you own a house, unless you are renting it out, is it making you any money? More likely not, and, in particularly in this market it has been going down in value for a while, right?”

“And what about gold”, I said. “Sure it has had a big rise in the last decade, and it has got a lot of attention in the media, but the bottom line is gold doesn’t pay you back any money if you own it, does it? If you own a bunch of gold coins, they are not sending you a cheque on a regular basis, aren’t they?”

At this point, as James seemed a nice enough guy, I continued. You see, I have this urge to help people see the benefits of dividend income investing. I wanted him to realise that this chance meeting could actually change his life, even transform his retirement strategy to a perpetually growing nest egg, paying him and his family tax free income for years to come.

“Fair enough, you got me on the housing side, for sure,” James said. “But what are you saying . . . that I should be buying shares, and not bother with other assets?”

“Up to a point, that is correct, James,” I said, adding “You can buy any asset as long as it pays you an actual return; that’s the key. It has to be a bona fide asset. It has to generate an appreciable income, a passive income”.

“A passive income”, James asked, looking at me rather confused.

I nodded, and said “While millions of people have to go to a job every day and work hard to get a salary in return, all I’m doing now is using my existing money to make more money, without lifting a finger. I even wrote an eBook on wealth creation about all this”.

“I like that idea”, James said, “But how do you do it”?

“It’s rather simple”, I said, “the more passive income you have, the less active income you need, and the more you can do what you want to do instead of what you need to do to survive”.

Clearly my message got across, when James subsequently asked “So, are you saying that dividend investing can grow into receiving unlimited passive income”?

“Exactly”, I said.

“So, is the secret then just to buy shares in a lot of high yielding dividend paying companies, sit back and collect the dividends?” James asked.

It was a fair question, because honestly that’s what everyone assumes when I talk about dividend income investing.

It’s one of the more popular reasons that some people give me when they say they decided against a subscription to Dividend Income Investor.com.

Why? Because when you see our winners they are often well known companies, and, the thought that “Yeah, why pay £200 for a subscription if I can find these companies myself” isn’t a far leap.

But that is also a clear trap because there is much more to dividend investing than the ‘right’ companies. It’s not just investing in the right companies, but also purchasing them at the right price. Which is exactly what I told James, and, where most people unfortunately go horribly wrong.

“Just picking the highest yielding dividend stocks is no good,” I explained. “You need someone experienced in dividend income investing who can analyse the underlining fundamentals of a company and determine what a smart entry price is”.

The price at which you buy is very important, because if you pay too much for your dividends it affects your returns over time”.

James looked puzzled. “Ok, let me give you an example,” I said.

“First of all realise that with dividend paying companies the lower the share price is, the higher the dividend yield. For instance if you buy the shares in a high quality dividend paying share at £2.80 per share, while it pays a dividend of 15 pence your dividend yield is almost 5.4 percent”.

“But if you would have bought it when its share price was £2.35, the dividend yield was nearly 6.4 percent, almost double current inflation rate.“

“Basically, you want to get as much return for your cash as you possibly can, right, taking into account the ability of a company to sustain that dividend. So those different entree prices are really important to maximise your returns long term”.

“Yes, I get that” James said “but I don’t really have the time to do all the research to find out whether this or that company is a good investment or not”.

“I understand that, James” I said “and that’s exactly why I have set up Dividend Income Investor.com for people like you who understand the benefits of dividend income investing but don’t have enough time or the inclination to put in the effort to do all the research by themselves”.

“That’s great”, James said, “but, if making money on dividend investing is so easy, why isn’t everyone doing it?” he asked.

Yeah, why isn’t everyone taking advantage of the power of dividends, I thought by myself, when buying them at the right price?

In my opinion, it’s the ultimate investment no-brainer, a strategy that puts you on par with investment professionals, if not in net worth than at least in the process of building wealth. They buy assets that pay them, why shouldn’t we?

“You know what, James”, I said, “most people aren’t even thinking about saving for their retirement, or they have fallen for the prevailing advice over the years to put their money in a house, or to play it safe with cash ISAs, or to chase the latest hot trends like what happened with tech stocks in the 90ties, or investing in some far flung developing countries fund soon thereafter.”

“The thing is, it doesn’t really matter what everyone else is doing,” I said. “What is important is now you know about the benefits of dividend income investing. What are you going to do about it? What you do from here can really change your life. Believe me, if anyone knows, I know, because dividend investing changed mine”. And that’s how I left it.

I was very happy, indeed, to see that James had actually taken my guidance to heart, signing up, a few days later, for two years, using our discounted subscription offer.

Whether you decide to follow James’ lead, or not is up to you. To achieve investing success, do what the rich do: buy high quality assets at undervalued prices that pay you back.

I agree that we all should be guaranteed equal opportunities – but not equal outcomes. If you want to get ahead, you gotta want it.

You have to make the effort to be smart with your money, live well within your means, and not make excuses when the time comes to prepare for your own financial future.

By subscribing to Dividend Income Investor.com you have made a giant step toward that very noble goal.

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