In this episode learn how much money you can make by investing in dividend stocks. I also cover real-life example of investing in Coca-Cola, Home Depot, Walmart, and ADM.
What I'll share with you in this episode:
- 2 ways to make money with dividend stocks
- 3 factors that determine how much you can make
- How a $4.9K investment in ADM turned into over $47K
- Examples of extraordinary returns
- How much can you make?
Here's the link to the Google Sheet to estimate your own returns: https://shorturl.at/anJSV
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In this episode we're going to take a look at how much money can you really make with dividend stocks. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode we're going to cover four topics Topic number one what are the two ways to make money with dividend stocks? Then we're going to move on to topic number two the three factors that determine how much money you can make. Then we'll move on to the next topic I'll show you some examples of extraordinary returns with dividend investing. And the last topic I'm going to show you exactly how to figure out or estimate, how much money can you really make with dividend stocks. Let's get started with our first topic the two ways that you can make money with dividend stocks. The first method is by capital gains and then the second method is through dividends. So let's first take a look at capital gains and what this basically means is that you're going to buy a stock when it's priced low and then eventually sell the stock when it's priced high. So this is what it looks like on the screen you want to buy low and sell high. Let's take a look at an example here. So let's say you bought a stock at $25 a share and then the price went up and you sold it for $35 a share. That means you made a profit of $10. That's a capital gains of $10. So let's say you had 100 shares in this example. So a $10 profit multiplied by 100 shares, you would make a profit of $1,000 through capital gains, which is buying low and then selling high. Now there's, of course, challenges with doing this. There's also a lot of time and effort involved, because you'd have to track the stock prices all the time and you'd have to know exactly when a stock is priced low and figure out exactly when it's priced high. So there are challenges to that. What I prefer, and what we as dividend investors prefer, are to focus not on the stock price but on the dividends. So now let's take a look at the second way to make money with dividend stocks. So first we're going to briefly talk about what are dividends. So dividends are simply the company sharing its profits with you, the shareholder. So if you own shares in a company and let's say in this example, the company is paying a dividend of $1 per share and that's an annual dividend, and if you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend of $1,000. And that money is deposited directly into your trading account as cash. So you can spend the dividends if you wish, or you can reinvest them, and it's very important because if you reinvest them into other stocks that pay dividends, you can really grow your dividend income. Now, keep in mind the dividends are separate from the stock price, because once you've bought the shares and, like in this example on the screen, let's say you've bought a thousand shares and you hold on to those thousand shares, the stock price can go up and down. Stock prices do go up and down all the time. So if the price goes down, doesn't matter. You still own a thousand shares and the company pays the dividend per share. So if you own a thousand shares and in this example the dividend is $1 per share you'll get a thousand shares. So the dividend is $1 per share, you'll get $1,000 every year. And there are dividend investors, and myself included, who have been earning dividends for decades and decades and decades. Ok, so those are the two ways that you can make money with dividend stocks through capital gains buying low, selling high or through dividends. Let's move on to our next topic, the three factors that determine how much money you can really make. And so the three factors are money, time and dividend growth. So let's take a look at money first. So in this example we're going to use a real life example. We'll look at Coca-Cola. Ok, so let's say today, as of this recording, the share price is $57 a share and the company is paying an annual dividend per share of $1.84. So remember, you have to hold on to those shares for a year to get that dividend. Now some companies pay the dividend. You know the annual dividend divided by the frequency of payment. So if a company is paying you a dividend every month, you'll get a small amount of money every month. In the case of Coca-Cola, they pay every quarterly. So every quarterly you get a small amount of the $1.84. But by the end of the 12 months, by the end of the company's sort of fiscal year, you will have $1.84 per share. So let's say in this example, you have $5,700 to invest and let's say you put all of that money in Coca-Cola. So, given today's share price, you're going to be able to buy 100 shares. So that's quite simple. To calculate the dividend also simple. We take the 100 shares multiplied by the dividend, which is $1.84. So in this example, you can calculate the dividend, which is $1.84. A $5,700 investment in Coca-Cola will give you $184 in dividends per year. Now remember, we're talking about money here. So what if you had more money to invest? What if you had $11,400 to invest? So now you can buy 200 shares instead of 100. So you've doubled the amount of shares. So what happens to the dividend? We take 200 shares, multiply it by the dividend of $1.84, and now you're making double the dividends than you did before. So now you're making $368 in dividends. So if we put these up on the screen, you can see what we just looked at. Two examples If you have $5,700 invested in Coca-Cola, you'll get $184 in dividends. If you double your investment to $11,400, you'll get $368 in dividends. Now I'm going to give you a really crazy example here, but it's still, in fact, true. So if you had, let's say, $2 million to invest in Coca-Cola, then you would make over $66,000 a year in dividend income. So what am I trying to show here? You can see that the more money you have to invest, the more money you can make in dividends, okay. So I'm going to say that again because that's really important. The higher the amount of money you have to invest, the higher the dividend income you will make. So you'll make more money. Let's move on to our second factor that contributes to how much money you're going to make. So that one is time. So in this example, we're going to take a look at Johnson Johnson. So let's take a look at Johnson Johnson's stock price over the last 12 months. So this is a one-year price chart and you can see it up on the screen and it doesn't, you know. Again, like I said, stock prices go up and down, but this one-year chart doesn't look really good because a year ago the stock price was $168 a share and today the stock price is $162. So if you look at this, you're not going to have any confidence to invest in Johnson Johnson. You're going to say, well, had I invested a year ago, I would have lost money. The stock price went from $168 a share to $162. So now we're going to zoom back a little bit. Let's take a look at the 10-year price chart. So over the last 10 years, now you can see on the screen what Johnson Johnson's stock price has done so. Now this is a little bit better. Had you invested in this company 10 years ago, the stock price was $90 a share and today the stock price is $162. So that's a pretty good return on your investment. Now we're going to give you one more example. We're going to zoom back and look at the last 53 years and you can see that the graph, the line goes up, up, up, up, up, up, up up over the long term. Right, and we don't have to go back 53 years, we can just go back to 1990. And back then the share price was $7 a share. So had you bought it then at $7, today you could sell it for $162 a share. So again, that is a fantastic return on your investment. So let's put all that up on one little nice table up on the screen. So if we're just looking at a one year timeframe so as of this recording and then we go back 12 months, if you invested in Johnson Johnson, you would have lost 3.3%. So you can see the capital gain was a negative 3.3% because the stock price has come down 3% from a year ago. But if we take a look at the 10 year graph, you would have made a 80.5% return. This is just a capital gain. We're not even looking at dividends yet, so that's just capital gains. And then if we go back 33 years to 1990, you can see that the stock has returned over 2,220%. So that is a fantastic return. So what am I showing here? What I'm saying here is that the longer you stay invested, the better and higher returns you can expect. And again, we're not even talking about dividends. Once we add dividends in here, the returns are even much higher. Now I'm going to keep moving on here. So just to summarize, when it comes to time, the more time you have, the more money you can make. Now it's better if you have both more money and more time, you can make even more. But let's move on to our next third factor here, which is dividend growth. So for this example, we're going to look at a company called ADM. So let's say in 2003, you had $4,968 invested in this company. Now the share price back then was $10.80, which means you would have bought 460 shares in ADM. So back in 2003, you can see here, the dividend was 24 cents a share. So that isn't a lot of money. In fact, if you multiply 24 cents by 460 shares, you'll see that you would have received in the first year $110.40 in dividends. So again, that's not a lot of money, it's $110. That's fine. The following year, the company increased its dividend to 27 cents a share Again not a huge increase, it only went up by 3 cents. But that means in the second year you would have made $124.20 in dividends. Now let's take a look at what the company has done to its dividend every year since 2003., and we can see here up on the screen, the company has increased its dividend every single year. As of this recording, the dividend now is $1.80. So it used to be back in 2003, it was 24 cents a share. Now the dividend is $1.80 a share. So this year you would earn, instead of $110 a year, you would earn $828 a year. So that is a huge increase. Now, even more interesting, if we add up all the dividends, you can see that this company would have returned to you over $8,700 in dividends since 2003. Now, remember you only invested $4,968, but you got back $8,705 in dividends. So the stock price has also gone up 675%. Once we include the dividends in there, you can see that the total return on investment since 2003 is 850%. That $4,968 investment today would be worth over $47,000. So you see what happened. We took the money the $4,968, and we invested it. We invested it over a long period of time, since 2003, and then we took advantage of the dividend growth. So those are the three factors that I mentioned a couple of minutes ago. Now, just a fun fact this company has been paying a dividend since 1927. This company has had over 47 years of consecutive dividend increases. They're not the only one. There's a lot of companies that have been increasing dividends for decades and decades. Coca-cola has had over 52 years of consecutive dividend increases. Every time the company increases the dividend, that's more money in your pocket. So dividends provide a real, tangible return on your investment While you hold on to those shares, because without the dividends, you're only hoping for the stock price to keep rising and hope is not going to cover your living expenses. Dividends can do that. So what happens when you invest in a company that doesn't pay dividends? Like I said, you're only hoping for the stock price to go up. Let's take a look at one example. This is First Solar Inc. This is a company that does not pay dividends. But let's take a look at the stock price since 2008. And you can see that the stock price has dropped in value. So had you taken the same $4,968 and put it in this company, first Solar, today it would be worth $3,272. So the value has dropped. Now you could argue the same thing could have happened with ADM. The stock price could have dropped in value and, yeah, it could have happened. Maybe, but you would still would have had a positive return on this investment because of the dividends. So take a look at the screen again. You invested $4,968 in ADM. The company returned over 8,700 dividends. If the company was to go bankrupt today and the stocks were worth zero, you still would have made money on this investment because of the dividends. Okay, so dividend growth the higher the dividend growth, the more money in your pocket. Okay, let's move on to our third topic in this episode examples of extraordinary returns. So I'm going to share with you three quick examples. And what is common in those three examples is the same thing we talked about before Money, time and dividend growth. So what happens when you combine money, time and dividend growth? Let's take a look. So the three examples I'm going to go back to Coca-Cola. We're going to look at Home Depot. We're going to look at Walmart Now. Imagine you invested a total of $8,350 in these companies Okay, a long time ago, because we were talking about time. The longer you stay invested, the better off you're going to be, and I'm going to get to the specific times in the next slide. But a total investment of $8,350 in these three companies today would provide you with over $921,000 a year in annual dividends. The shares alone would be worth over $47 million. I know these numbers sound extraordinary and that's why this section, this topic, is called extraordinary returns. So this is what the investments look like. So you would have had to invest $4,600 back in 1960 in Coca-Cola. You would have had to invest $2,100 in 1981 in Home Depot and $1,650 in 1970 in Walmart, and so Coca-Cola's investment would have provided you today with over $202,000 in dividends. Home Depot would have provided you with over $259,000 in dividends annually, and Walmart would have provided you with over $458,000 a year in dividends. Okay, so that's the combined portfolio up on the screen. We just looked at it and, for those of you that are interested in learning more behind those numbers, we also talk about the dividends. We talk about stock splits, which I'm not covering in this episode, but please go back and watch episode number seven, and we cover all of these three examples in more detail in episode seven. Okay, let's get on. Move on to our next and final topic in this episode. So how much money can you really make? To help answer that question, we're going to use a free tool which I'm going to make available to everyone. We'll have a link down in the description below and I'll show you up on the screen how to get access to that free resource, and it is basically a Google Sheet, so we're going to go ahead and use that. I'm going to show you exactly what it looks like, so right now you can see up on the screen. We're on the simplyinvestingcom homepage, so I am now going to scroll to the bottom of the page and you can see here, under resources, we have FAQ, frequently Asked Questions. I'm going to go ahead and click on that, okay, now I'm going to scroll just a little bit down. What we're looking for is question one, dash 19. It's right here. It says how much money can you make, and so I'm going to go ahead and click on that, okay, and right here you can see the last sentence and again, I'm going to put a link up to this question in the description below, so it'll take you directly here. And then, when you get here, you want to click right here where it says use our Google Sheet to estimate how much money you can make. So I'm going to go ahead and click on that link right now. Okay, it's going to say make a copy, and that's what we need to do. We need to make our own local copy of the Excel spreadsheet. I'm going to go ahead and click on the button make a copy. Now we can see that the Google sheet is up on the screen in front of you. So just to make things a little easier, I will just zoom in a little bit Easier to see all of the numbers. Okay, so this is really simple. Now, keep in mind this is a spreadsheet for estimating purposes only, right? There's no guarantee of any future returns. So this is an estimate because it depends on so many different variables. Which company are you investing in? When did you buy the shares? How often is the company increasing dividends? How often is the stock price going up or down? Right? So there's a lot of considerations and variables. So what I tried to do here is just to keep it simple. At least it'll get us sort of 80, 85% of the way there to get an idea to estimate on how much money you need to start investing with and how much you can have in the next 5, 10, 15, 20 years. Okay, so you'll notice that there's it says here step one, step two, step three and step four. So the only thing you need to change, and the only thing you should change, is just the cells that are in green. Okay, so, step one there's a starting balance and I'll take you through this in just a minute so you can change the values that are in green. So the starting balance in this case it's $100,000. So I'm going to assume this person is starting with $100,000. And that might currently be sitting in their mutual funds, index funds, etfs, a 401K plan, ira or, if you're in Canada, rsp or a TFSA account. Okay, all of those accounts are combined. So let's say you've got $100,000 in those accounts and let's say you were to put that in dividend stocks. Okay, so we start with the starting balance of $100,000. And again, feel free to put in any number you want. Put in your own numbers in there. Then we go on to step two. So what is the additional investment each year. So in this example, this person is able to contribute an additional $5,000 a year towards their savings and towards their investments. Okay, so we're going to leave that at $5,000 for now, okay. And then step three is the dividend yield. The average dividend yield today in North America is about 3.5%, but again, you can change that. If you're investing in companies that have a higher yield, you can put a higher number in there. If you're investing in companies with a lower yield, you can change that number. Step number four, and you can see that's the last column right here and it talks about stock price growth. So I've left it conservatively at 4.5%. Now, if you read any kind of investing books, they'll tell you that over the long term, the last 70, 80, 90 years, the entire history of the stock market has been on average in North America anywhere between 8% to 10%, 11%. Okay, so I'm going to leave it at 4.5% for now. And again, you can change those numbers. If you want to put in 6%, 7%, that's fine. That is sort of an average annual growth over the long term, okay. So if we take a look at this, this person has a starting balance of 100,000. Okay, and they're investing 5,000 a year additionally In the first year they can expect to earn $3,675 in dividends. Okay, the ending stock value so this is based on the 4.5% stock growth. So the value of the stocks has come up a little bit, okay. And then so we add up the ending value plus the dividends and you can see that the portfolio at the end of the year again, this is just an estimate should be at around $113,400. Okay, so you can see that this person in this example, by the time they get to year 11, will be making over $10,000 a year in dividend income. Okay, and then you can see, by the end of it, after 20 years, they will have earned over $126,000 in dividends and the portfolio would be worth a little over $713,000. Okay, let's just try one example here. I'm just going to change the number here, and then we'll change this one and we'll reduce this one too. Okay, so now I'm starting with $500,000. Again, this is generally going to be somebody who's already in their 30s or 40s, a working professional, and this is a combined portfolio 401k, ira, rsp, investments, tfsas, all of that. So we start with $500,000, we invest $100 a month additionally Okay, so that comes up to $1,200 a year, and we can see that this person, by the time we get to year 10, which is right here would be making over $35,000 a year in dividends. Okay, and then you can see the rest of the numbers here, so I'm not gonna read those out. The portfolio after 20 years would be worth almost $2.4 million. Okay, but look at year 10, this is important because a lot of people say well, for me to earn $35,000 a year in dividends, I have to invest the million dollars, because the dividend yield is 3.5%. So that's true. If you're investing a million dollars today and you wanna make $35,000 a year in dividends this year, so yes, then you need to start with a million dollars to make that much dividend income. But a lot of people don't have a million dollars lying around. So if you can start early remember we talked about time the sooner you start, the better off you'll be If you can start early and in this case, the person started with $500,000, didn't start with a million but by the time they get to year 10, their portfolio is generating over $35,000 a year in dividend income. Okay, so feel free to use this Google spreadsheet. You can play around with the numbers and that's what it's designed for, right? So if you wanna get to a point in time based on your age and you're saying, well, in 20 years, I wanna be making X number of dollars in dividends a year, right, so this number here, then you can play around with the starting balance and you can play around with how much you're willing to invest each year in your investments and then see how close you get there, right? So again, this is just an estimation tool, so feel free to use that, and this will help you to get a better sense of how much money can you really make with dividend stocks. Now, does this mean that you should go out and buy any stock today that pays a dividend? And the answer is no. There's a couple of more things that you need to check before you decide to invest in any dividend stock, and so my approach to investing and what I teach is how to invest safely and reliably for the long term. So you wanna invest in not just any dividend stock. It has to be a quality stock and not just at any price. It has to be priced low. So how do we know? When we're looking at any company anywhere in the world, how do we know that it's a quality stock and that it's priced low. So for that, I've created what I call the 12 rules of simply investing. You can see the rules up on the screen here. I'm gonna go through them in just a minute. For those of you that are interested, we do have a simply investing course that I've built. It's an online course that's self-paced. It's gonna take you through all of the 12 rules, so it goes through the 10 modules. So we cover the investing basics. We cover the 12 rules of simply investing. I'm gonna get to those in the next slide. We then show you how to apply the 12 rules using a separate Google Sheet where you enter in all the data and the Google Sheet automatically highlights the rules that a company fails. And then we show how to use the investing platform how to place your first stock order, building and tracking your portfolio, knowing when to sell which is just as important as knowing when to buy. How to reduce your fees and risk, especially if you have mutual funds, index funds and ETFs. I'm gonna provide you with an action plan to get started and I answer your most frequently asked questions. So the 12 rules are rule number one Do you understand how the company is making money. If you don't skip it, move on to something else. Remember, these 12 rules are your checklist. A company has to pass all of the 12 rules before you invest in it. Even if it fails one rule, skip it, move on to something else. Okay, so rule number two 20 years from now, will people still need its product and services? Rule number three does the company have a low-cost competitive advantage? Rule number four is the company recession proof? Rule number five is it profitable? Rule number six does it grow its dividend? Rule number seven can it afford to pay the dividend? Because if it can't, we don't wanna invest in that. Rule number eight is the debt less than 70%? Rule number nine avoid any company with a recent dividend cut. Rule number 10, does it buy back its own shares? Rule number 11, is the stock priced low? So we look for three things. We look at the P-E ratio. We wanna make sure it's low. We compare the current dividend yield to the average 20-year dividend yield and then we look at the P-E price-to-book ratio and if a company passes those three conditions, then it passes rule number 11. And finally, rule number 12, keep your emotions out of investing. Okay, Now for those of you that are interested, in addition to the course, I've spent a little over two and a half years building the Simply Investing platform. The platform is a web app. It automatically applies these rules to over 6,000 companies in the US and in Canada every single day. So when you log into the platform, you can see which companies pass which of the rules, which companies to consider and which ones to avoid because they're overvalued and they fail some of the rules. Okay, so make a note of the coupon code save 10. It's gonna save you 10% off the course and the platform. The coupon code, again, is save 10, s-a-v-e one zero. So if you enjoyed this episode, be sure to hit the subscribe button. We have a new episode out every week. Be sure to hit the like button as well, and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.