Over the past few months, I have changed my investment strategy significantly. As I mentioned a couple weeks ago, I am now investing in several dividend-producing assets to see which investment produces the highest return. I call it a challenge, but it is ultimately a tool for analysis. Essentially, I will track my progress so that both you and I can be better informed investors going forward. Why invest more money in something just because it is the traditional way to do it when you can be getting a better return elsewhere? I plan to update everyone on the status of this challenge every month (mid-month), so be looking for that update soon.
As I have been focusing on optimizing the money that I have saved/invested, I have started to process how this focus already has and will change my life. Dividend investing, also known as cash flow investing (because it is investing in ways which produce income), literally changes how you look at life. Let me explain how it has changed my perspective.
1. Appreciate the Small Growth with Long-Term Goals
I have a couple thousand dollars already invested in ETF's. ETF's offer a little more security than stocks because you can invest in a wide spectrum of companies instead of just one individual company. While I have that money invested, much of the ETF's pay quarterly dividends, ranging from approximately 3-5% (annually). That means that I am not expecting a whole lot of money when it come time to receive the first dividend. But that's okay.
Part of the process in investing in cash flow investments is understanding that it takes time and that any small amount of progress is progress. Sure, a few dollars more each month is not going to mean that you can afford to quit your day job, but earning $15 for not doing any extra work is a lot. Especially when you combine that with an exponential growth by reinvesting your dividends. In other words, while it may be $15 a quarter this year, it will be more next year and the year after that. Eventually, it could be hundreds or thousands of dollars each and every month. What's not to like about that?
The important thing is that investing in dividends helps you appreciate the patience and diligence that it takes to get you to that point.
2. Investing in Dividends Helps you Reduce Your Spending
Another change in one's lifestyle that happens as a result of focusing on cash-flow investments is to reduce your spending. This happens through focusing on your cash flow. As you probably know, cash flow is income minus expenses. That means, that by investing for the purpose of generating income, your goal is ultimately to increase your cash flow. Focusing on this isn't one sided. Once you begin to see both aspects, you start asking another question. You don't just ask how can I make more money? BUT ALSO, how can I reduce my spending.
This just makes sense. Why would you work to make more money with your investments if you are just going to throw your progress away by spending more? More importantly, if you are investing in such a way so that you can be financially independent (your dividend income is greater than your expenses), why would you make it harder on yourself by spending more money. The simple fact is that you wouldn't. When you get serious about cash flow investing, you begin to limit your spending. This does two things: 1, it reduces the amount necessary to reach financial independence (as I just mentioned), and 2, it gives you more money to invest going forward. If you can cut your spending by $500 each month, that is $500 more each month that you can put to use to generate income.
Focusing on dividend investing isn't just a unique investing strategy. It is a change in lifestyle and philosophy in how you see your personal finances. It will radically alter your life and help you focus on what is important (hint: what's important in life is not stuff that you can buy with green bills or a couple plastic cards). I have seen this change in my life even in the past few months. Not to mention, with focusing on investing so much, it keeps me distracted and not focusing on spending and even taking loans for material possessions. Not only does it make me I'm excited to see what kind of progress my wife and I can make over the next few years and am happy to share my progress along the way.
Also read: Which Investment Has The Least Liquidity?
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.