The Power of Dividends & Having Fun

Experts like Warren Buffet will tell you it is very hard to pick individual stocks and beat the market, and he is right.  That is why people like Warren Buffet suggest investors stick to low cost index funds, add to them regularly and enjoy the power of compounding over many years.  For most people this takes place in their company 401k, which also can provide a match and powerful tax benefits, adding to the potential for growth.  It is the approach that is most likely to yield great results.

That said, some folks like to take a small percentage of their assets (perhaps around 10-15%) and “play around” with individual stocks, crypto-currencies, or any other form of gambling one enjoys partaking in.  To me there is an entertainment factor here and a psychological one.  If you lose all the money it will not put your families future at risk.  At the same time this construct satisfies a human urge for some kinds of risk taking and fun.  Why are casinos packed every single weekend?

If we are going to talk about the practice of owning individual stocks, think about stocks that provide a dividend.  How nice to own an asset that sends you a cash payment each month.  The business literally shares a small slice of their profit with you, one of the many “owners”.  These are stocks like Pfizer, Coca-Cola, Johnson and Johnson, IBM, Apple, etc.

A neat trick with these scenarios is to reinvest the dividend each month and create a self perpetuating stock buying machine.  Each month instead of taking the cash, one can have the company buy more shares for you, this is a DRIP, Dividend Re-Investment Plan.  I believe a psychological benefit to these plans is one actually can care less about the ups and downs of the market because when the stock is down your dividends are buying more stock.  This is just another potential strategy to build wealth in an automated fashion that takes very little effort on your part.

Here are some neat stocks that offer a dividend:

If you have specific questions about specific stocks or DRIP information, please consult a fiduciary financial professional.

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