Dividends
Show me the money
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I’m not going to pretend I’m the world’s greatest investor. For many years I avoided the stock market and focused on my home because I didn’t trust the it. It’s a crapshoot. I read many, many books on the topic and worked at an investment bank so I know a bit about the way the market works.
Basically, when it gets too high, you know it’s going to crash at some point. But when it gets too low, it’s likely going to bounce back, which I took advantage of recently as I’ll explain below. But that depends on each individual stock and how the company weathers the downturn.
The topic of high frequency traders was particularly enlightening. Does the little investor even have a chance if there are people sticking their servers as close to the trading facility as possible to reduce network latency? Well not in that game, but in high quality long term investing, yes.
Even though I DO NOT consider myself an investment guru, the only time I used a stock broker the one stock he told me to buy that I didn’t pick myself was a massive loser. And when he told me to hold my one stock doing well in a down market I told him — sell it. Now. Good thing I did because it crashed the next day. I also witnessed the insanity of the dot-bomb and the real estate investment crash that personally affected me while living in Seattle. I’m a fan of DIY investing if you have the time to learn.
Instead of focusing heavily on investing in the stock market back then, based on my skepticism from studying the market and working in the field, I invested in my home and property and improvements to increase the value of my house. That paid off because I lived in Seattle where housing prices were skyrocketing and by chance I bought at probably rock bottom. That was just luck because honestly I did not have a lot of money and that timing was not any sort of great insight by me, except that I knew real estate was down. But it paid off.
In fact, it was simply the right time for me to buy a house and I was lucky enough to find one that fit my budget.
I recently used some of my stocks to buy my current house because I knew they were way overvalued — and they were. The market crashed shortly after. That move seems to be paying off in terms of increasing property value (where you buy a house matters), except now the interest rates have skyrocketed and there’s some things to fix on said house. Which are going to cost: a. lot. And oh yeah inflation. And tariffs. So real estate is tricky. It doesn’t generate you any income if it’s your primary home.
Neither do stocks unless you sell them — or they pay dividends.
Here’s my two cents for anyone who wants to listen on a less risky strategy to get into investing and make some money potentially — but like I said I’m no investment guru and you should do your own research. But I’ve done a fair amount of research and have some experience working for an investment bank and running a company. So I’m not completely clueless either.
I would recommend the countless books on dividends out there, books by Warren Buffet, and a book called Fooled by Randomness (very important) if you try your hand at investing in the stock market. I also mention some others that are super interesting or helpful below.
Why am I even writing about this? Honestly I don’t even know. It is just something I’ve wanted to write about for a while. Maybe because someone told me about dividends when I was younger but I didn’t really get it or listen and I wish I had.
So this is an off-topic post to tell all the people starting out in their careers about them and how to get some income flowing every month by investing in dividends. You don’t need much money at all to get started — but it is a risk. And it is a long term strategy — not a quick fix. So understand the pros and cons before you jump in.
When you buy a stock that pays dividends, it will pay you some part of their profits on a regular basis — maybe quarterly and some even pay monthly but be careful to analyze the stock — not simply count on a high dividend yield which can vanish if it’s all smoke and mirrors.
The yield is the percentage of the stock price that you’ll get in dividends each month.
Like if the stock is $10 and it pays a 3% yield then you’ll get:
10 * .03 = $.30 per year
or
.30 / 12 = .025 per month.
Woo. You say. That doesn’t even buy me a cup of coffee. Well, first of all, if you want to start investing, what kind of coffee are you buying? That cup of coffee could have been a dividend paying stock instead.
The main point is, if you start small, add a few bucks every month and keep reinvesting your dividends thats when things start to exponentially grow. Get yourself a spreadsheet. Do some math. Figure out how much you need to invest to have $5K per month, adjust for inflation, when you retire. Or how much you need to invest to get a downpayment for a house and how long that will take. If you want a quick fix in one year — not gonna happen. If you persistently invest over years in high quality stocks — you’ll see if you do the math correctly.
Think about this. You buy a stock for $100. It grows 10%. So now it’s worth $110. Great but now you have to sell it to get your $10. And by the way you’re going to get taxed on that $10 when you sell it. If you sell it within a year the taxes are going to be higher than if you hold it for a year. After after you sell it — no more growth. No stock. You’re not making any money.
If you reinvest your dividends you keep getting more and more shares of stock — and all those shares are paying you more and more dividends. And eventually, if you have a lot of money or keep doing that for years, you’ll end up with a nice monthly payout from all your dividends — IF you invest wisely in companies that are stable and will continue to pay dividends.
If you have invested in loads of growth stocks — then you have to sell the stock to make money — and if the market crashes the price of stock can drop dramatically and if you are in a jam you may need to sell them at that lower price to cover some bill. Alternatively, if you have build up a portfolio of dividend paying stocks, you may continue to get dividends on a monthly basis to pay your bills in a jam or reinvest in more stocks even if the price of the stocks has fallen if you have chosen wisely, grasshopper.
Mind you, yield is tricky because the stock price is always changing. A higher yield is good but a high yield might indicate the company is performing badly so it’s stock price is dropping dramatically and …that could indicate that the dividend is going to get cut or worse — the company drops the dividend altogether and the stock price is dropping and maybe the company even goes out of business. So you’ll want to look at more than just dividend yield.
All that is more than I can cover in one blog post but here are a few tips.
First, you have to understand the difference between your retirement accounts and an investing account that is not a retirement account. If you invest in a retirement account, you can significantly reduce your taxes over time, and that is huge. In an ideal world you’d put all all your investments into retirement accounts because you’ll pay less taxes and get more of your money for yourself. However, if you ever need that money, you’re going to end up paying a penalty — possibly more than the taxes you would have saved in the end.
So my strategy is this:
First, and foremost, definitely invest in a retirement account. If your company matches your deposit — TAKE IT. It is rare to get a 100% return on your investment! Do it.
If you don’t know what you are doing, or maybe even if you think you do, put that money into an index fund. It will not do better or worse than the market as a whole. Read Warren Buffet’s books to learn about index funds.
Most people who try to “play the market” lose in the long run. I personally have some investments in index funds I don’t touch and consider 100% retirement funds I don’t want to take chances on. I dabble with other strategies in a non-retirement account which is money that I don’t obviously want to lose, but if I do lose some I’m not going to lose it all.
If you are just starting out, perhaps take a very small amount — only what you can afford to lose (because you might) in a non-investment account (after taking your match and putting some into a retirement account) and start learning about how to invest that money in the stock market.
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Pick low-priced stocks (not under three dollars or too low as those can be very risky and possibly go out of business) but if you invest in say $10–30 stocks you can diversify more easily. That means buying a number of different stocks instead of putting all your eggs in one basket. Read up on diversification elsewhere. It is an important topic that you will want to understand.
Suze Orman has a podcast, TV show, and books and is another good resource. She says something like more more than 3% (I forget the exact number) in any one stock in your portfolio. But you’ll probably want to limit the number of stocks to a number you can actually stay on top of and monitor.
As things change you may want to buy more or sell. For example, you’ll want to know if the chances of the stock continuing to pay a dividend changes or if it stops paying altogether and get out of that stock and into something else. If you have too many it might be harder to stay on top of all the news.
Note that you can also buy partial stocks but I don’t really like to do that. I like to know exactly what price I paid for each stock and how much I got. It’s easier to see that if I’m getting a full share of stock. I’m also aware of the tricky things that go on with rounding.
In fact, I hate when my brokerage buys stocks using partial dollars. I wish they had a setting to not do that because all those partial cents over millions of accounts adds up and sometimes they can be manipulated. Remember, I used to build the back office systems that perform those calculations. I know what can go wrong. But at least I can see exactly how many shares I have and check their math on that pretty easily.
Here’s my huge warning — if you are trying play the market — what works today likely won’t work tomorrow as things are always changing. I remember someone once telling me the market always goes down on Fridays because people pull their money out over the weekend. So he would buy stocks on Fridays.
Guess what. Recently the stocks I tend to purchase are lower on Mondays and Tuesdays. All those silly games aren’t going to work. They are like betting in Vegas. And playing the stock market is still technically gambling but so is deciding what house to buy or where to take a job. You make a calculated decision based on the information available to you — and you want to use solid information not silly little tricks like that.
What you need to understand when you select a stock is what makes up a stable company that is going to be around for the long hall. And one of the best things I’ve found to figure that out is low debt to equity ratio. What a lot of private equity investors do is jack up a company’s debt and then the company ends up going out of business. I’ll let you read up on private equity investors, a topic for another post.
And as always there are exceptions to all rules. Some companies with higher debt may do well because they leverage that debt in a way that makes long term sense and not all private equity investors are evil money grubbers, I’m sure. But in general, lower debt is likely more stable. And private equity investors have a reputation of killing companies.
We’re not dealing with private equity here though. We’re investing in the public stock market which has various rules and regulations designed to protect companies and individual investors — to a degree. You still have to be careful.
Check to see if the company has consistent revenue and to a degree — profits. Though to understand how revenue may be falsified and profits can actually have a downside when it comes to taxation and investment into R & D (research and development). I’ll refer you to countless other books on business, business taxation, and investing. Too much for this post.
But likely revenue that is on a constant downward trajectory or if profits are shrinking that may warrant some investigation. Note that smaller companies may appear to grow faster and growth will likely slow at larger companies but they may be more stable. So I’m not giving you any hard and fast rules here. Just something to research further on your own time.
A lower P/E ratio is generally a good indication of value. See Warren Buffet’s book for more about that. But sometimes companies find ways to manipulate their P/E ration or it simply works out that the company is a value trap. Just know that if the P/E ratio is too high there’s a good chance the company is overvalued.
The payout ratio indicates how likely a company is going to be able to continue to pay it’s dividends. If the company is using debt to pay dividends, that’s not a good sign, for example.
Be aware that all the above numbers may vary by industry. Negative numbers or lack of numbers in any category are often a sign of trouble. Certain types of investments have different variables you’ll want to understand instead of using a blind formula across the board. For example, a category of investments called REITS have different expectations as they use their debt to invest in property which has value — though it is illiquid to a degree so you still have to be care with the “oh this industry is different” mindset. Some industries have different rules when it comes to taxation of money returned to investors as well such as royalty trusts.
I keep saying this: do your homework.
Read the news. Don’t jump ship or buy on every little announcement — which is referred to as emotional investing. Just be aware if there is some major or forthcoming change that will likely affect your specific investments and adjust accordingly. When I say read the news I’m not talking about the mindless “Oh the stock market is up today because xyz” or “down today because of abc.” Most of that is unintelligent noise.
I’m talking about things like a lawsuit against a mining company I was about to invest in that was going to temporarily halt their operations. Though they had consistently paid dividends in the past, clearly that was going to affect their ability to do so in the future. Thankfully I did my research before investing rather than simply looking at past numbers and did not invest.
I am also constantly revising which stocks I buy each time I invest rather than just reinvesting in the same stocks because that’s what I did last time. If you want to be an investor you have to constantly stay on top of the news and review the latest numbers each time you make a purchase. Otherwise you’re just blindly gambling.
Learn from history. Read about the crazy over investment fads like tulips — and llamas of all things. My dad wanted to start a llama farm but thankfully my mom didn’t let him. Read about the various market crashes over time and what triggered them and how they affected investors in the short term and the long term. Who benefitted and who suffered the most?
Those are just a few tips. Like I said there are whole books on these topics and I’ve read or listened to many of them, as well as books on things like futures and options (highly, highly risk and I personally avoid those), real estate investing and countless business books.
I think one of the things that has helped me most understand how to invest is by understanding what it takes to run a successful company — which comes down to cash flow in many cases and keeping expenses under income. As profits expand and contract you can adjust your spending to maintain a stable company, so that’s why I look for similar traits in the companies in which I invest. I know that falling revenue doesn’t exactly mean a company is going out of business and rising revenue means squat if a company is spending more than it earns with no real expected ROI on that spending.
There are many different strategies for investing. Different strategies are more or less successful depending on the current state of the market. For example, when the market was very low after covid I knew it was too low. I invested in Amazon and Microsoft and their prices have doubled since then. That exceeded my dividend investments.
You may want to pursue a strategy that involves a mix of growth (investing in companies because you think their stock price will grow) and dividends. But mostly I find growth investing too risky. You don’t know for sure the companies will grow or how much and the rate at which stocks can grow is also related to how fast they can fall. The bigger they are, the harder they fall, as they say.
When it comes to growth investing I see this common trend. Investors buy these high priced stocks because they know the name and that is what everyone else is investing in…so the stock is overvalued. Then the market crashes and the price was very high and not worth it based on the value of the company so investors lose — a lot.
Or you fell for the latest news craze like the investors in the dot bomb era, the crazy investment in derivatives that led to the 2008 crash (read The Big Short: Inside the Doomsday Machine by Michael Lewis — absolutely fascinating), or maybe you jumped on the recent AI bandwagon — something I’ve been writing about in my more technical posts as I research how well AI performs on various tasks. We’re already seeing some of the downsides of that exhuberance.
That doesn’t mean that e-commerce companies were not a good idea, real estate investing is bad, or that AI is not going to change how we operate. It’s just that the hype cycle is a bit much. Learn to see through the noise. Invest in things you know and understand.
And by the way — bitcoin is for criminals. The reason the value increases, when it does, is because it’s used for criminal operations such as ransomware that shuts down hospitals. So yes, the price may increase over time but also be aware of what you are investing in. Also be aware that the criminals control the price and can tank it if they want — you have been warned.
If you put your bitcoin (or whatever your favorite crypto is) in some sketchy “crypto bank” or exchange, those are so many times mysteriously breached and people lose all their “coins”. In addition, crypto is one of the highest value targets for attackers — and my job is cybersecurity so I know such things — and if you lose it for some reason there’s no bank that is going to help you get it back. On the flip side, if your credit card is abused the bank just reverses the transaction for you.
So some things to consider. No hard and fast advice as I’m no investment guru. But I might suggest that if you are frustrated about your finances right now — consider what would happen if you start investing in dividends in a non-retirement account in addition to your retirement account and start growing your income that way. Eventually the market will change, and hopefully you’ll be a bit closer to your goals if you patiently start investing and reinvesting dividends now and plan for the future.
Just remember — if you sell all your dividend stock or don’t re-invest your dividends, you’re not going to increase your income long term.
I have absolutely no reason for writing this that helps my financial situation in anyway so I ask myself why I am doing it. I guess I just want to help others by sharing some of the things I’ve learned. I was also triggered it to write it as it’s related to my next AI post where I mention building back office systems that process dividends — and I realized that some people might not know what dividends are and I should explain them in more detail.
But really I’ve had this post on my mind for quite some time for the younger people who read my blog and are just getting started in their careers — so no paywall here like all my other career advice blog posts. If you are so inclined to thank me you could tell someone you know to hire me or buy a book. Beyond that it’s just some free advice to consider that might help you in the long run.
Make sure you do your own homework and read a lot of other sources such as those I mentioned above!
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Teri Radichel | © 2nd Sight Lab 2025
About Teri Radichel:
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