Welcome to High Dividend Investing, aka HDI. For my entire investing career, I have been attracted to stocks that pay dividends. If a company that I own a part of is doing well and is profitable, I want to be paid!
Over the decades, the market has gone through phases where dividend stocks were out of favor, and phases when they were in favor. Yet in every environment, the power of having significant cash-flow in a portfolio is undeniable. Cash is always king.
Looking even further back into history, the most valuable of assets have been those that in turn generate more money or wealth. Land, Farms, Businesses, and Debt Instruments have all be highly sought after for what they payout, not just for having them to hold. Why should investing be any different?
Investors seek dividends for a variety of reasons. One of the most common being retirees who are looking for a way to monetize their portfolio without having to sell shares. Yet having an income stream is so much more than that. It offers a tangible value to your portfolio that does not fluctuate with share prices alone.
Whether the market is up or down 5% this month, a dividend stream is reliable, predictable, and useful. This is why I created The Income Method, an investment strategy centered around building a portfolio that provides a large amount of regular dividend income. I have combined foundational values of immediate income investing with value investing to form a new outlook on the market.
A portfolio that has regular cash distributions always has cash. Have you ever seen an opportunity in the market and been unable to buy because you didn't have cash? Or do you keep a large amount of your cash on the sidelines, earning nothing, waiting for such opportunities? Both can be negatives. Ideally, you want to have cash on hand to take advantage of opportunities when they arise, you also want to minimize holding large cash reserves and possibly missing a bullish run.
Buy Low- With What Money?
We all know the most basic investment advice of all time: Buy low, sell high. Yet when March 2020 rolls around and most investments are heavily in the red, many found themselves unable to take advantage of the selloff. When the market is at its lowest is precisely the best time to be buying. It is also the time when margin is restricted, few stocks are trading at prices you would consider selling at and maybe you are facing some personal financial disruption.
These kinds of opportunities are rare and must be taken advantage of, it is a shame to have all your capital tied up when they occur. When you have dividends being paid into your account several times a month, every month, cash is never far away.
If you hold cash, that violates another commonly accepted principle: time in the market is more important than timing the market. Money sitting in cash is earning zero return and has a very real opportunity cost.
Investors with a well-diversified income portfolio have nearly constant income flowing into their portfolios. If I just tied up all of my cash in an opportunity, I can rest easy knowing that more dividends will be paid to my account soon.
This is the power of the Income Method. Whether cashing out the dividends for retirement, reinvesting to compound returns, ensuring you have free cash to take advantage of trading opportunities or just the sheer joy of collecting dividends- having a solid stream of income provides you the flexibility to achieve your goals regardless of what those goals are.
That is what it really boils down to. Why is cash "king"? Because it is the ultimate flexibility in buying power that can be directed towards the best use regardless of what that use is.
We frequently value companies based on their current and expected cash-flows, why would you value your portfolio differently?