Although I’ve written in the past about different categories of stocks and portfolio diversification, I haven’t spent much time on the question of dividend stocks. Everybody seems to be in love with dividend investing right now. Looking at the Guide to Personal Finance Blogs, there are at least 40 investing blogs that focus specifically on dividend investing and hundreds of recent posts that discuss some aspect of dividends. We all love the idea of lounging in piles of cash dividends, but is it mindful for individual investors to seek out dividends or prefer dividend stocks?
The Dividend Investing Love Story
I reviewed a bunch of articles from personal finance blogs, websites, and other publications to find out why so many people love dividend investing. How do they love thee, dividend investing? I could count many ways, but the core reasons for dividend investing generally fall into five main categories.
1. Better Performance – Dividend stocks have historically out performed the broader stock market. It’s easy to find data presentations like this one from Ned Davis Research supporting the superior track record of dividend stocks.
Now that we’re nearing the end of January, it seems like a good time for a status check on those New Year’s resolutions. Or were you one of those people who decided to call them something softer like “goals” or “targets” this year, because that felt less likely to immediately careen into failure? Some have suggested that people fail in their New Year’s resolutions 92% of the time, although I had difficulty verifying that statistic. If you’ve already backslid on a New Year’s resolution or two, I suspect the whole “goal” thing isn’t quelling that slowly rising sense of defeat. I used to repeat this pattern of resolution and failure year after year, until I realized I should just stop making resolutions. It was my last New Year’s resolution; one of the few that I ever kept.
New Year’s resolutions are the Silenus of the self-improvement pantheon. Silenus was a minor Greek god of drunkenness and wine making. He was the step father and mentor to Dionysus, the god of wine. He was also the champion drinker of all the satyrs. According to Euripides, Silenus said, “The man who does not enjoy drinking is mad.”
New Year’s resolutions are born in a metaphorical, and often literal, drunkenness instilled by the threshold of a new year. Like an intoxicated pirate crossing the international dateline, we hope sailing into the next calendar year will somehow magically imbue us with a new understanding of our foibles and better self-control. Our New Year’s Eve inebriation temporarily convinces us that we share the supernatural powers of Silenus, who revealed deep wisdom and even foretold the future, but only when he was drunk.
As a long-term investor, you inevitably have to consider what to do with dividends and interest income as it accumulates in your investing accounts over time. You have two basic options:
Reinvest dividends and interest in the stocks, bonds, or other investments that generated the income.
Apply the income to something else, like spending, investing in something else, etc. Add your favorite idea here.
Given everyone’s financial situation is different, I can’t help you much with the second option. For all I know, perhaps you desperately need that next dividend check to pay off your loan shark before he breaks your legs. You’re probably the only person in the world who can decide at any given moment whether income can be better used for something other than investing. So, this post is confined to the pros and cons of the first option, under the assumption that the main reason you’re even reading this post is to maximize the return on your investments.
I started the Mindfully Investing website mainly because a lot of widely available “conventional wisdom” or “standard advice” offered to individual investors seemed suspect or even downright dangerous to me. By applying mindfulness principles to my own investing approach, I often came to conclusions that were at odds with much of this standard advice. Now that I’ve generated nearly a hundred articles and posts on a wide range of investing topics, it makes sense to summarize some of the Mindfully Investing findings that depart from key concepts of the conventional investing cookbook.
It also seemed like a good excuse to work on my infographic skills, which I’ll admit are still pretty dismal. So, I created the Mindfully Investing Score Card shown below.
It’s important to realize that this Score Card comprises just 11 of the most important, and perhaps surprising, Mindfully Investing conclusions that conflict with commonly offered advice on the internet and in the media. (I guess I could have made a “top 10” list, but I couldn’t bring myself to further prune this list of topics.) There are many other aspects of the Mindfully Investing approach as detailed throughout this website that run counter to some common investing assumptions and approaches. And as importantly, there are many additional conclusions in my website that are consistent with or support some of the commonly available advice out there. Trying to “summarize” everything from nearly 100 pages would be pretty futile, so I kept my list to these 11 key antithetical findings.
You may be wondering how in the world I reached some of these conclusions. Accordingly, I’ve provided links to the detailed articles that provide copious evidence supporting all these conclusions as shown in the “Mindfully Investing Verdict” column. If you have good reasons to disagree with any of these findings, I invite you to comment on the linked articles or on this post. I’m always open to new ideas.
As a successful small business owner and early retiree, my life is a good example of the cause and effect between the daily practice of mindfulness and personal finances. From my perspective, it seems strange that the mental and physical health benefits of mindfulness are routinely celebrated, but the “financial health” benefits of mindfulness are hardly discussed. Perhaps some people feel that bringing up the topic of money cheapens the role of mindfulness in a fulfilling life. Or perhaps discussing money immediately raises the distracting concern that something is being marketed. But in the reality of our society, healthy finances are a bedrock foundation that supports almost all other aspects of a fulfilling life including physical health, mental health, relationships, and even our capacity to love. Let me assure you that I’m not trying to sell you anything, other than an idea. That idea is:
Mindfulness and healthy finances create a virtuous cycle, where 1) mindfulness improves your finances, and 2) improved finances gives you more freedom to pursue a more mindful, compassionate, and fulfilling life.
The steps in this virtuous cycle are shown in this graphic.
Let’s take a closer look at how this virtuous cycle works.