The secret value of dividend yields: reduced risk of capital loss

One thing I try to bring into focus in my various writings is not only the value of various investment tools, but also their risk. There seems to a big movement afloat to find the tool with the least amount of risk. Everyone wants to dodge risk and avoid it all costs.

The problem is, you can’t. The only way to grow adequate retirement wealth is to take on risk and then mitigate it. What does that mean? It means that you recognize risks are out there and you actually have options in place if and when the risks become true. Because eventually, some risk factor will kick in.

When it comes to investing in stocks, I’ve mentioned many times how I have picked some strong dividend payers and am accumulating their dividends to either buy more shares or pay off my debt of funding. Do you know what happens anytime I mention this plan for investing in stocks to other people? I get shocked reactions.

“Your buying stocks? Isn’t that risky?”

“What if there’s another melt down?”

“Wouldn’t it be safer to buy a mutual fund or an index fund?”

These are typical reactions from people that have been coached since Day 1 by their employer’s 401K representative, by money-based magazines, by many financial radio shows, and by gobs of articles. The only place you should be putting such important money is into safe, risk free vehicles like 401K funds.

Risk free 401K funds – they don’t exist

When one of your friends tells you to pick risk free mutual fund, tell them there are none. The stock market corrections of 2000 and 2008 knocked the entire mutual fund industry on its side and caused a huge number of people to jump ship. Not everyone did, but in order to satisfy those that bailed out, a lot of funds had to sell holdings when they were down and lock in a loss for everyone involved. To make matters worse, many funds had to maintain their status, so they actually increased fees on those that stayed in!

Looking at my stock position in VNR, I can see how much the total value has grown since I bought it. It’s actually up, but only a few percentage points. But over the past few months, I have been raking in 8.5% yields on a monthly basis. Essentially, if I added up all those dividends and subtracted them from my cost basis, THAT’s how much the stock would have to dip to REALLY impact me.

Every month that I receive another dividend check from VNR is another month that my position gets more solid. This growing value of my stock position isn’t reflected in either the price of the stock or its cost basis. When looking at historical charts for the stocks performance, there is nothing that tilts the graph based on dividend yield, and hence, many people don’t see the time value of holding stocks directly instead of mutual funds.

Another place I can see this magic of secret value growth is my children’s custodial accounts. I opened an account for each and put a certain amount of money in each. I bought shares in two different stocks and set the accounts to auto-reinvest (DRIP) with each dividend. In this situation, the entire price of the stock plus all dividends will gather together over time. While the value of the stocks may slowly appreciate in value, the compound power of buying more shares will also kick in. I can already see that despite both stocks actually being negative from when I first bought them, the total value of the account is higher than the initial seed money I put in. With that, I can see that the money is truly growing, and nobody is taking out any annual fees on the order of 2-4%. (Of course, I’ll need to run this by my accountant so proper taxes are paid.)

Leave a Reply

Your email address will not be published. Required fields are marked *