Welcome to Part 3 of the ‘Creating Multiple Income Streams’ series. Today we’re talking about the stockmarket, and more importantly dividends.
Now that you’re earning lots from your job and side hustle you can put some of that hard-earned cash to work.
That’s the key isn’t it?
Make your money work harder than you do.
Otherwise what’s the point?
Now if only they had taught us that shit at school. Most of us would be much better off today.
If you missed part 1 & 2 – you can check them out here:
Investments work while you sleep. They’re an awesome passive income but they don’t necessarily start in a passive way.
Your savings account still plays an important part in creating multiple income streams. Although I wouldn’t really call this an investment as the interest earned on a savings account is minimal and your funds will generally get eaten away by inflation.
The money you earn from your job will go into your savings account which in turn can be used to purchase shares. Ideally, you’re already saving at least 10% of your income and working your way up to saving 25%, then eventually 50% as your expenses reduce and your income grows.
Cash in the bank might make you feel secure but it’s not going to give you an income. Instead what you want to do is figure out how much you need aside for emergencies and your peace of mind, then use the rest to invest.
I’m aiming to retain 25% of my money in cash and the rest will be used to invest in good quality shares on the Australian Securities Exchange (ASX). In the USA the equivalent to the ASX would be New York Stock Exchange (NYSE) or NASDAQ and in the UK it would be the London Stock Exchange, etc. So wherever you’re located you’d be buying and selling shares through that stock exchange.
WHAT IS THE ASX?
The ASX is the place where you can buy and sell shares in Australian companies. It’s a market operator and clearing house. At the same time it also helps to educate investors and ensures operating rules are followed.
The products and services that investors can trade on the ASX include:
Shares (or equities)
Exchange Traded Options
REITs (Real Estate Investment Trusts)
LICs (Listed Investment Companies)
Interest Rate (or Income) Securities
Which products and services you invest in will depend on your risk profile and investment objectives.
For the purpose of this article, we are focusing on shares (stocks or equities).
WHAT ARE SHARES (Stocks or Equities)?
A share or equity or stock is buying part ownership of a company. The terms: shares, equities and stocks can be used interchangeably.
Public companies have a certain number of shares available that are traded on the Australian Securities Exchange (or its equivalent in other countries). Investors purchase these shares and in effect become ‘part owners’ of the company which also gives them voting rights.
Some companies pay out a portion of their profits to investors in the form of dividends. While others reinvest in the growth of the company.
I like the idea of having income and growth available when I purchase a company. So whilst a company might not grow as fast (although it can), you’re still receiving an income.
The company’s need for growth and expansion will impact on the dividend yield. The more cash they need to growth the business, the lower the dividend that’s paid to shareholders.
Dividends are often paid out twice per year.
HOW IS THE DIVIDEND YIELD CALCULATED?
Dividend Yield = Annual Dividend Per Share / Current Share Price
So, if a company share is $40 and it’s paying a $1 and $1.50 dividend for a total of $2.50, then:
Dividend Yield = $2.50 / $40
Considering banks are paying about 2% for your savings, that’s a pretty decent return.
HOW ABOUT TAX SAVINGS?
Some companies pay dividends to their shareholders after they’ve already paid their 30% tax, then the shareholders receive a form of tax credit for the amount of tax that has already been paid. These are known as franking credits.
For unfranked dividends, tax is payable on the entire amount as the dividend has been paid to the shareholder before any tax had been taken out.
WHAT ARE THE DRAWBACKS OF CHASING DIVIDENDS?
While it’s great to receive an income twice a year from your investments it does come with a couple of drawbacks.
You end up with average to low growth and lower returns because the profits are going to the shareholders as income rather than being reinvested into the company to encourage growth and expansion.
You have to weigh up what’s best for your financial situation. Your age, income, risk level and objectives will help decide whether you should be chasing dividend yields or companies with growth potential.
HOW MUCH DO I NEED TO GET STARTED?
The good news is that you can be a shareholder of a company with just a few dollars. You can create a portfolio that will pay dividends over time starting with as little as $500.
However, before making a purchase you have to consider how much you’ll be paying in fees.
Some brokers charge a percentage while others charge a straight fee.
So let’s say the brokerage fee is $50. If you purchase a parcel of shares valued at $500, you’re paying 10% in fees. If you save up and purchase a parcel of shares for $5,000 the fee works out to be only 1%.
Then again, if the price is right, you don’t want to be waiting to save more money and lose out on any appreciation in the asset during this time.
You have to figure out the best option for you.
WHAT DO I BUY?
You can purchase shares that will give you growth, shares that will provide you with income, and shares that can do both.
The question to ask yourself is: What do I want to achieve from my investment portfolio?
Do you want capital growth, a regular income, or both?
I like the idea of both.
While some people might take the income and spend it, I prefer to reinvest my dividends. So whenever a company pays out dividends from their profits, instead of getting a cheque in the mail or bank transfer, I get more shares.
For example, in Australia, bank shares offer a high yield. At the time of writing, you can earn up to 5% on your investment plus growth. A savings account might give you 2%, a term deposit 3%. So you can see that the income can be attractive.
At first reinvest these dividends and watch your investment grow. Each time you increase your savings by a further few thousand dollars, get a bonus, or a windfall, put some in cash and invest the rest.
Speak to a financial adviser and do some of your own research so that you at least have a basic understanding of the share investing and the companies you’re interested in purchasing equity in.
If you don’t like the idea of direct shares there are other options open to you like managed funds, listed income companies and index funds. Make sure to weigh up the pros and cons of each, as something that may look attractive at first could turn into a nightmare over time.
The purpose of my portfolio is to create a future income stream. Currently my income from it is a few hundred dollars per year which is not enough to sustain my lifestyle. This may and probably will change in 5-10 years time. Right now I’m focusing on quality companies that will likely grow over time.
How do I decide which companies to purchase shares in?
Here’s a few questions I ask:
What does the company do?
What is their asset to debt ratio?
How much income do they receive?
What’s the dividend yield?
What’s their position in the market?
What is their potential in the current market and future trends?
What are the strengths and weaknesses?
Then I go speak with my broker. Sometimes we agree, sometimes we disagree.
I’ll always take his advice on board, but in the end it’s my money and the ultimate decision of what goes in my portfolio is mine. I’m a control freak so I will never let someone else make the final decision on where my money is invested.
WHERE DO I FIND ALL THAT INFORMATION?
Well, it’s easily done with a quick Google search. Public companies publish their financial reports and these are generally available to shareholders on the company’s website.
Take BHP for example. Jump on www.bhpbilliton.com, click on Investor Centre link and then on Shareholder Information. On there you’ll find all the information regarding the share price, dividends, historical prices, general information, and frequently asked questions among other things.
So what’s so good about reinvesting my dividends?
Well, let’s say that each year for ten years you manage to purchase $100,000 worth of stocks. After taking inflation into account your return is 4% growth and 4% income. You reinvest the income.
After 10 years if you just let the portfolio grow but take the dividends in cash, you’ll end up with about $148,000. Reinvest the dividends and you’ll have closer to $215,000 thanks to the compounding effect of reinvesting. That’s over 100% return on your money. Give or take a few thousand depending on market fluctuations and the companies you choose to purchase shares in.
There is always a risk when you invest.
The lower the risk, the lower the return. The higher the risk, the higher the potential return.
There is also a risk to doing absolutely nothing.
I’ve purchase shares in companies that have gone bust (luckily, I sold a few months prior to that happening so avoided the losses, but others weren’t so lucky). I’ve sold shares in companies that a few months later rose by 50% and kicked myself for doing so.
I consider investing as a form of gambling. It’s not gambling in a traditional sense, but you’re always betting for the market to go up. Will it or won’t it? No one, can ever be one hundred percent certain.
Which is more reason that you have to educate yourself to some degree even before you seek investment advice. And always, always seek professional advice.
If you want to learn about investing in shares, I highly recommend you read the following books:
The Snowball: Warren Buffet and the Business of Life
Now, when I talk about investing in shares, I’m talking about being in the game for the long haul. No trading here.
You purchase and you don’t check out the market every five minutes panicking because there’s been a sudden fall by 20%. These things happen. Unless there’s reason to worry and pull out (nine times out of ten there won’t be) then stay put, talk to your broker and see if it’s worthwhile topping up your investment.
Remember to always get professional advice before making any financial decisions.
As Warren Buffet put it, ‘be fearful when others are greedy, be greedy when others are fearful’. So stop listening to the media (they tend to over-exaggerate), do your own research, get advice from professionals not your next door neighbour who once lost his savings on a get rich scheme.
You’re an adult, you’re smart. Start acting like it.
Think for yourself.
Get appropriate advice.
Do your own research.
Make your own informed decisions.
Take responsibility for your actions.
Sometimes you win, sometimes you lose, but if you stick with it for the long-term and take emotion out of the equation, you should come out on top.
I’ve started on my share portfolio slowly. I wish that I topped it up in the last few years before we decided to build a house, but we live and learn. I’m good at doing things backwards.
My aim for 2017 is to double my current (very modest) share portfolio and continue to reinvest the dividends.
I’m reinvesting this stream of income so that it continues to flourish and grow and will provide me with a better income in ten or fifteen years time.
I’ve done the same for my son. His share account is set up for dividend reinvestment so that it will grow over the next 18 years. The plan is to buy him parcels of shares for his birthday and/or Christmas, as well as increase share portfolio whenever his cash savings grow over a certain percentage of total assets. That way when he finishes school or university he’ll have an investment portfolio to get him started on the road to a comfortable financial future.
It’s never too late to start investing in shares to build a portfolio of growth and income.
Share investing is a great way to diversify your income streams and can prove to be very successful over the long-term.
Have you ever invested in shares? Are you considering dividends as one of your income streams? Would you spend the income or reinvest the dividends so your investment grows over time?
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** This article is for informational and entertainment purposes only. Always seek professional and personal advice before making any investment decisions.