The Problem With Dividend Investing (For Passive Income)

Building passive income with dividend stocks can be one of the best ways to build wealth, but today I want to talk about it's problems

I love building passive income by investing in dividend stocks and today, I want to tell you the other side of passive income and why dividends may not be so great. First, let's start with the 4 major reasons dividends are the best ways to start investing - especially for beginners.

Reason #1 - Superior Returns
The Hartford Study showed that dividends have historically played a pretty significant portion of the stock market’s return in the last century. The last 50 years of data shows that dividends people received and then reinvested back into the stock market have been responsible for 78% of the total stock market return. If we want to go back even farther than 50 years to 1930, giving us a lot more data to look at, in that time period, dividends were responsible for almost half of the returns at 42%.

Reason #2 - Longevity
Money that’s been invested in the stock market has returned anywhere between 8% to 9%. Just because the stock market has though, doesn’t mean real people have, and the reason for that is because people get scared, they panic, they try to time the market, and they sell their stocks at a loss. According to the BlackRock Investment firm, the average investor made only 2.1% in the last 20 or so years which is barely above inflation. Being a dividend investor, gives you the staying power to actually make those 9% returns.

Reason #3 - Safety
I don't have to time the market to enjoy a good retirement like what happened to people in 2008 when they lost their IRAs and 401ks. I can focus more on cash flow and not worry about my stock values are day to day.

Reason #4 - Peace of Mind
As the stock price falls, the dividend yield increases, and vice versa. So I will be paid based on my initial investment. So if I bought $100 of Coca Cola and it was giving me 4% per year, which is $4 a year, it will continue paying that even if the stock fell to $50, it will still give me $4 a year. It’s a good feeling to know that I’m still making money that at any time, I can use to pay my bills. It’s cold hard cash, and it’s all the proof that I need that the company is making money.

Here are some bad reasons to being a dividend investor for passive income.

Reason #1 - Dividends are not guaranteed. In 2020, there we dozens of companies that cut their dividends. It’s not a contract between us and a company that we will be paid dividends. At any moment, companies can hugely decrease their dividend payout or even worse, completely get rid of of the dividend and there is nothing we can do about it.

Reason #2
Dividends limit total returns because, when a company is paying out a dividend, it's another way of saying they have run out of ideas to grow. It might be also signal a declining company. Because it’s no longer growing, the stock price tends to increase less than that of growth stocks. Reason

Reason#3
Dividends are not free and you will pay more in taxes. When a company pays out money, the stock price drops by the same amount. You’re just taking money from one place, and putting it somewhere else. Like a transfer from your savings account, to your checking account. Dividends you receive are taxed, so you’re forced to pay capital gains taxes on dividends where in contrast, growth stocks don’t pay out so there’s no forced withdrawal, so you don’t get hit with taxes.

Reason #4
It decreases diversification. If you’re investing in dividend stocks, that means you’re only investing in large established companies, otherwise known as “large cap” stocks. But you’re missing out on the new up and coming companies that have the potential to be the next Tesla - the small cap companies.

Reason #5
Dividends are only advantageous emotionally, and nothing else. They don’t provide any real benefit over growth investing other than making you sleep well at night.

*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

[DividendBull]

Dividend investing has always been significantly more satisfying than the buy and hold strategy to me. It's so much more exciting to receive distributions every quarter or month as opposed to waiting years and years to sell. You can use those distributions to pay bills, go on vacation or reinvest to make even more next time there's a distribution.

[MrsStephanie]

Dividend investing is most effective when approached with a long-term perspective. While dividends can provide immediate income, the true power lies in the compounding effect over many years. I'm still looking for companies to make additions to my $350K portfolio, to boost performance. Here for ideas...

[TheCreditShifu]

I think this is good advice, but better for people who are closer to retirement. My opinion for young people is you need to be both a dividend investor and a growth investor, and you can let the market determine your allocation. For example I just got a 1000% gain on Tesla and then pulled 85% of the money out and went into a load of more stable dividend stocks like AT & T. So I would say diversify, but also use those growth opportunities to build the capital to invest in the dividend payers (or in cash flowing real eastate)

[michaelswami]

Dividend investing is like an orchard owner. You harvest the apples and, your investment, the trees, is still there. Growth investing is like a lumber company owner. To harvest your investment, you have to kill the trees.

[ThinkFinance]

I think a balanced portfolio with dividend and growth stocks makes total sense. Dividend gives the passive flavor while growth accelerates account value.

[brandontownsend]

I'm glad I watch Andrei and Graham Stephens videos at 15 instead of cat videos

[georgecooper]

Investing in the stock market is the most common way for beginners to gain investment experience.

[mathebulamkhize]

Buying a stock is easy, but buying the right stock without a time-tested strategy is incredibly hard. Hence what are the best stocks to buy now or put on a watchlist? I’ve been trying to grow my portfolio of $260K for sometime now, my major challenge is not knowing the best entry and exit strategies... I would greatly appreciate any suggestions.

[pizzaguy]

Great video.❤ You and Gary Joe Wilde are recommendable experts every investor who wants to get rich investing must embrace closely. Unfortunately, don't know why Gary chose not to own a video channel here like other experts. He is long-established and very advanced in the field.

[jerryscotfield]

Joined the Navy at 18 with 7k in the bank. I did janitorial and smoked a lot of pot in high school. Left the Navy after months with 32k in the bank. Invested 29k in the S&P in late 90. Started working at UPS, Exide Battery and did concrete on Saturdays. Invested 1k a month every month into it, Cashed out 250k from the S&P and invested with my Financial advisor Lucy Maria Koss. Cashed out and Semi retired at 31. Took a year off. Traveled. Came home and started working part time for the insurance, entertainment and pocket change. Work isn't work when you don't have to work. Becoming wealthy can be done in few years. It feels like 60hr work weeks. Feel the pain of discipline early or feel the pain of regret later. I wish everyone well!

[FinancialShinanigan]

It takes patience to become a dividend investor but it pays off in the end!

[Kriss]

*watches Andrei pull money out of computer*
Girlfriend: "it's just editing right?"
Me: "no, it's MA-JIKH"

[Artmis]

“I come from an immigrant family that didn’t teach me how to take risks” wow I felt that

[BenSemisch]

Some great points. I'm on the Dividend investing train because I work freelance and the end goal is to stabilize my cash-flow by having regular dividend payments. Only making a couple bucks a month so far, but I'm just starting the journey.

[gh]

💥💥💥Let me summarise the learning pointers of the whole video for all of you.💥💥💥
🌟Why Dividend investing strategy is good?🌟
1. Hartford study (1:49)
2. Longevity(2:48)
3. Timing the market(3:45)
4. Peace of mind(5:30)

🌟Why dividend investing strategy is not so good?🌟
1. Dividends are not guaranteed(7:00)
2. Dividends limit growth (8:30)
3. Dividends are not free (9:55)
4. Decrease diversification (12:00)
5. No real benefit (12:40)

Thanks for sharing with us this information!😀👍

[chandlershepard]

It's always good to listen to a logical counter argument so you don't brainwash yourself into failure or ignorance. That said i am still going down the dividend rout. I'm only 21 and by the time i'm 45, or older, the snowball will have grown to avalanche levels. And even if I pay a little more in taxes if single, the majority is still completely passive income that i can build while i work and invest in other ventures, i.e real estate.
"if you don't find a way to make money in your sleep, you will work until you die"-Warren Buffet, the guy who makes almost $600 mil from Coke dividends alone.

[vernellron]

Bitcoin is the beginning of something great a currency without a government, something necessary and imperative.

[cameronmiles]

As a young investor my problem with dividend investment is simple. I don't have enough capital to get it going. The small amounts I'd earn so that I could re-invest are so small they'd be pointless for too long of a time. I see more success focusing on growth stock and good growth stocks I happen to see that give dividends.

[kashfortheking]

“Imagine a guy named Kevin...” funny stuff

[Buhtbeard]

I like that low-key shade you threw at "6-videos-a-day, Kevin."