Dividends are the Ultimate Rewards Program Part 2

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Dividends are the ultimate rewards program for investors. They are a distribution of a portion of a company's profits to its shareholders. Dividends are a great way for companies to reward their investors for their loyalty and commitment to the company. In this blog post, we will discuss why dividends are the ultimate rewards program and how they benefit investors.

First and foremost, dividends are a tangible and reliable reward for investors. Unlike other rewards programs that offer points or rewards that may have a limited lifespan or expiration date, like those flyer miles, dividends are a direct payment to shareholders that they can use as they see fit. Whether they want to reinvest the dividends to buy more shares or use them for other expenses, dividends are a valuable reward that can be relied upon.

Secondly, dividends are a great way to provide consistent returns to investors. Companies that pay dividends typically have a stable financial situation and are less likely to suffer from market fluctuations. This stability provides investors with a sense of security and helps them to plan for their financial future. Additionally, dividend-paying companies tend to be more attractive to long-term investors, who are looking for consistent returns over time.

Another benefit of dividends is that they are a great way to increase a company's attractiveness to investors. By offering dividends, companies are signaling to investors that they are financially stable and committed to long-term growth. This can attract more investors to the company and increase its stock price, which can benefit all shareholders.

Moreover, dividends are a tax-efficient way to earn income from investments. In most countries, dividends are subject to lower tax rates than other types of income, such as interest income or capital gains. This means that investors can earn income from dividends while keeping more of their earnings. Some dividends are taxed at the usual income tax rate and others such as REITs are taxed at the capital gains rate, which is often better for low earners. 

Lastly, dividends can also provide a valuable source of income for retirees. Retirees often rely on income from their investments to support their living expenses. Dividends can provide a steady and reliable income stream for retirees, which can help them to maintain their quality of life in retirement.

     Monthly or quarterly dividend income can be a great source of wealth for early retirees also. Owning stocks and bonds that provide returns are truly passive investments, and can be set it and forget it. This is why a lot of the online community are big fans of exchange traded funds like SCHD and JEPI and VNQ, which we also appreciate at our homestead.

In conclusion, dividends are the ultimate rewards program for investors. They are a tangible and reliable reward that provides consistent returns, increases a company's attractiveness, and provides a tax-efficient way to earn income. Additionally, dividends can be a valuable source of income for retirees. As an investor, it's important to consider dividends as a factor when choosing which companies to invest in. By investing in companies that pay dividends, investors can benefit from a valuable and reliable rewards program.

The Shotgun Approach to Buying Stocks

When it comes to investing in the stock market, there are two main schools of thought: diversification and concentration. Diversification is the idea of spreading your money across a variety of different stocks, while concentration is the idea of putting all of your eggs in one basket.

There are pros and cons to both approaches. Diversification can help to reduce risk, but it can also limit your potential gains. Concentration can lead to higher returns, but it also exposes you to more risk.

In this blog post, we will discuss the benefits of holding small amounts of many stocks. We will also explore some of the risks associated with this approach.

Why Hold Small Amounts of Many Stocks

There are several reasons why you might want to hold small amounts of many stocks. First, diversification can help to reduce risk. When you invest in a variety of different stocks, you are not putting all of your eggs in one basket. This means that if one stock goes down in value, it will not have a major impact on your overall portfolio.

Second, diversification can help to increase your potential returns. By investing in a variety of different stocks, you are giving yourself a chance to participate in the growth of different industries and sectors. This can help to offset the losses that you may experience from other stocks. This can be a great thing if there is something going on, like a banking failure or an energy crisis. You may lose money on some of your investments in those classes, but since you were also invested in consumer goods and real estate, you did ok overall.

Third, diversification can make it easier to recognize and manage your portfolio gains. When you have a large number of stocks, it can be easier to see which stocks are performing well, which should trigger a wise investor to deposit more money into that holding.

The Risks of Holding Small Amounts of Many Stocks

While there are many benefits to holding small amounts of many stocks, there are also some risks associated with this approach. First, diversification can lead to lower returns. When you invest in a variety of different stocks, you are not likely to experience the same highs and lows as you would if you were concentrated in a few stocks. This can lead to lower overall returns.

Second, diversification can make it difficult to track your performance. When you have a large number of stocks, it can be difficult to keep track of their individual performance. This can make it difficult to make informed investment decisions. That is why using some of these new online tools can be very helpful, such as the app Stock Events.

There are both pros and cons to holding small amounts of many stocks. Ultimately, the best approach for you will depend on your individual circumstances and risk tolerance. If you are looking for a way to reduce risk and increase your potential returns, then diversification may be a good option for you. However, if you are looking for the highest possible returns, then you may want to consider concentrating your investments in a few stocks.

Here are some additional tips for holding small amounts of many stocks:

Do your research. Before you invest in any stock, make sure you do your research and understand the company's business model and financials.

Diversify across different industries and sectors. This will help to reduce your risk if one industry or sector experiences a downturn.

Rebalance your portfolio regularly. This will help to ensure that your investments remain diversified as the market changes.

Monitor your investments closely. Keep an eye on the performance of your stocks and make adjustments to your portfolio as needed.

By following these tips, you can help to reduce the risks associated with holding small amounts of many stocks and increase your chances of success.

Why I Switched Credit Cards Like Leaving a Bad Job Behind, and Haven't Looked Back

     Not long ago I did something I never do, specifically, I got a new credit card. Previously for most of my adult life I had been using credit cards that gave reward points, which I had used to buy Christmas presents with. 

     Fueled by a head spinning with ideas about travel reward hacking, I decided that it was silly to get reward points. I don't travel much, but the idea of shopping around for cards is a good one. 

     So I applied for a credit card that gives 1.5% cash back. I know that's pretty common, but the credit limit on this card is about 10 times higher than on my previous cards. More importantly, this 1.5% is deposited into an investment account, which I could transfer to my checking account to pay for Christmas presents with. Or could invest the money.

     If you are interested in this card, email me, and I will send you a link to it. Tentance  at gmail.

Schwab and SCHD, Amongst Other Things

     So you probably already know that ETFs, or Exchange Traded Funds, are groups of investments that are sold on the stock market like individual stocks. But they are managed funds, usually with low costs, and are particularly helpful for adding diversity to investments. 

     SCHD is one of my two favorite ETFs. It has holdings in a large number of diverse companies that are reasonably well protected from recession. It has extremely low expenses at 0.060%. And if you were to invest $100k you would get back over $3k a year in dividends. That's not bad. 

     Did I mention that having a gamut of stocks that pay dividends is my personal investment strategy?

The Case Against ETFs, or Why ETFs Are Stupid

     Perhaps you may or may not have ever thought about investing in Exchange Traded Funds, which are groups of investments managed by professional investors who earn money on the investments. These funds are rarely part of the offerings of 401ks, perhaps because of their inherent expenses. But they are certainly interesting groups of investments and can help a person diversify or target what they have invested in, for example, zeroing in on a section of the economy like real estate or energy, or choosing a specific goal for the investments, such as dividend investing.

     With the internet becoming what it is, and with apps available readily for pickup investing on the fly, and investing/economic news being readily available, it may seem silly to pay professional investors to manage investments for you. For example, Schwab and JP Morgan both have free brokerage accounts that link to your bank account that will execute trades for you for no fees. 

     The case for ETF buying is that, well, it's easy. If you find an ETF that meets your needs, it's pretty easy to buy a number of shares and then forget about it. Say you want to buy some stocks in renewable energy, but don't feel like doing the research on your own? Just buy some shares in a renewable energy ETF and call yourself diversified. They can also do some interesting trading things, like using options to grow the investments.  

     The case against buying ETFs is a big one. It's fees. All the ETFs that I have been learning about have fees, the best ones are less than 0.40 percent, but it still could end up being a lot of money every year. The more you have invested the more you pay in fees.

     How can you avoid fees and still make great diversified investments? That's a good question. The best way that I can see is to see what the ETFs are holding, do research, and buy the individual stocks in the ETFs that you prefer.

Early Retirement Extreme

 

    

     I finished reading all of the blog posts from one of the first financial independence blogs, called early retirement extreme. Jacob, the author, does a fairly decent job of pointing out one way to get financial independence, which is to slowly adjust your lifestyle expenses downward so that your investments can support your life. 

     While he never really gets into the meat and potatoes of his investments, he does state that they are all financial and from earned income, rather than inherited or heavily real estate based, which I appreciate. He speaks a lot about his journey, with his wife, as they move from an expensive apartment into an RV, which I appreciate.

     And then things go sideways.  He gets a lot comments from people that he is not really retired because he does things that he wants to do that also earn money, like editing specialized scientific texts and writing online for cash. Then the posts slow down, and Jacob sells the website. He later writes to sat that he and his wife have moved into a real house and he found an amazing dream job.

     So all the posts have a happy ending, whether true or half true. 

     I have no doubt that all the wussipants naysayers on the internet cajoled Jacob into retreating from writing, sadly. Or perhaps he came to the end of his inner content, which, if true, is fine. I would like to read his book sometime when I get the chance.

     That being said, this website is about one man's journey with financial independence. It does not really talk about investing other than to stay heavily stock invested.  

     One thing Jacob doesn't talk about much is that he retires from working but his wife still works. She splits all the bills with him and does half of the shopping and cooking. While I think that is admirable and something we should all aspire to, it decreases his cost of living by half. Or it increases his cost of living due to needing to be near her job. It's unclear what the case is with them during the time of the writings, but it is interesting.  

The Prosper Experiment

      Years ago I decided to try out peer to peer lending as an experiment to see how to invest some money. I originally started with $100 in lending club and $100 in Prosper. Since that time, lending club stopped allowing Florida residents to be lenders, so have dumped them. Prosper seems to not have a problem with my residency

     In the last 6 years I have added more lending money to my Prosper account, so that I now have a total of $1000 invested. The money has grown, it says that its growing at an 8 percent return rate, but the balance shows that I have $1400, all invested in loans. That's kind of amazing, because other than the occasional email statements I had completely forgotten that I had this account. And Prosper had been quietly reinvesting my money into new notes.

     The downside to this investment is that it is really quite difficult to get your investment back quickly. To withdraw your money, you have to turn off auto investing, and then wait. And wait. And wait. Which makes sense, as most of these loans are over a 5 year time frame. As your money becomes liquid again it can quickly be transferred back into your checking account.

Yield on Cost

     I have recently been trying to learn a little bit more about investing, as it seems to be something in life that truly does matter. With the economy changes that have been happening since the pandemic, I feel like a lot of the more useless parts of the world economy are going to start dying off, like nail salons and pizza restaurants. I think that people are headed toward a future where they will have to be willing to do more for themselves like cooking and cleaning. That being said, I still think there will always be a need for an economy, there will hopefully always be groceries available and homes to live in.

     The investing strategy I am currently Interested in is called dividend investing. That is where you own stock in a company andbit pays you a small share of its profits, usually this is just a few cents per share of stock. Not all companies pay out dividends, but some do. Theoretically, if you own a large variety of a lot of stocks you could be living off the dividends, assuming you are living cheaply.  

     Yield on cost is the ratio of how much it will pay you, the yield, for the cost of the stock. I found an amazing yield on cost calculator here. You just type in the ticker symbol and it tells you the yield on cost ratio per thr most recent dividend payout information.

     Before purchasing any stocks it is wise to learn about the company first, but this can be one great way to figure out how to work this investment strategy. Another way is to figure out what the funds at the large investment houses are buying sticks in and holding those individual stocks. Remember that you should have a broad and diverse investment strategy and not be heavily invested in just one sector like healthcare or oil.

Frugal is the new green

     It might come as quite a shock to you to learn that I am kind of a cheapskate. Having grown up in a working poor family, and made it myself to the working poor class, I finally had eventually come to the realization that money isn't all that matters. Actually beyond a certain minimum threshold,  money doesn't matter much at all.

     What is that minimum threshold? Having a safe and clean shelter to be protected from the elements, nutritious food, healthcare, and access to entertainment like books and culture. Beyond that I feel like it doesn't probably matter too much. That's why last year I decided to wear only clothing that cost less than $5 per piece if new or to buy used from stores like goodwill. Didn't do too badly at the challenge either, but I did end up having to buy two new scrub tops thanks to a change in jobs, unfortunately $25 each.

     So I spent the year wearing mostly recycled clothing, which was fine.

     I also spent the year handwriting my clothes and line drying them, to save money.  The washing part doest save all that much money over using the clothes washer but the line drying definitely saves a lot of money. 

     So I spent the year hanging clothes outside, which was fine.

     I harvested a lot of water hyacinth and ginger leaves from the garden to cook up and eat, and I grew a large portion of the duck and rabbit diets in the yard. 

     So I spent a lot of time eating organic growies in the garden, which was fine.

     I enjoyed listening to quite a few podcasts and articles for free online, and rented dozens of audio books from the library website for free. Which was fine.

     I bake bread from scratch and homebrew wine. This year I have mastered the art of making homebrewed wine from frozen concentrated grape juice, which I have to admit, is kind of amazing. Also apple juice. For the bread I like to use the breadmaker for easy clean up. I have learned two things about homemade bread this year - that if you add too much yeast that will result in a problem and that the knife for slicing really matters ot you will awful slices.

     Which was fine.

     I don't have a gym membership. I think that gyms cost a lot of money and they usually require driving to get to them, which I usually don't want to do. Besides then you are around other people, and it can make me self conscious to be all sweaty and wild hair when I work out. So I have a kettlebell and a rowing machine and a few other pieces of exercise equipment, which has more than paid for themselves. 

     So I worked out a lot for nearly free. In fact, this scale app says I'm doing pretty good for my age, don't be jealous. So that's fine.

Reddit Author Discloses Screenshot of his Roth IRA Dividend Investments, $637 per year

     He didn't exactly say what his total amount was in his investment account, but he kind of said about $14k, but we do know that he is a normal person with a normal job, not a doctor or lawyer.

     What I like about this post is that it reaffirms that I am not the only one going down this rabbit hole. Also it shows that it is possible to get some great returns with strategic planning. Sadly, he got a lot of nagging regarding the fact that it will take him his whole life of Roth IRA contributions to get to his goal of $6k of income a month, which is a high goal. People were overly critical and negative too, sadly. Probably jealous.

     *writes down all his top positions*

     *writes down all the commenter top suggestions including SCHD, PSTL, CSCo, VYM, VIG, NOBL, DGRO, MO, O, GAIN, JEPI, QYLD, ENB, BCE

      My goal is about $10k of income per year. That's what I need to retire. That might be too hard to do with dividend investing, but I can try.

     What's your savings goal?

     The original post is here

How I managed to have no tax burden for 2022, and you can replicate this too!

     Shockingly, I just finished up my taxes with a little bit of help from the H and R block website, and discovered that I owe no taxes and will be getting back all the money that I put in. I say put in, but really it was taken from me because of exemptions.

     How did I manage to lower my tax burden? A few ways. 

     For one, I was able to claim Head of Household. This is the first time ever that I have claimed Household, because I have always let my kids fathers claim them. But this year I claimed one of the three children, and was able to receive the now reduced $2k credit.

     Secondly, I contributed to the company's 401k plan. I also contributed to a Roth IRA. Between the two of them I was allowed to take the Savers Credit, which is for low income filers and couples who contributed to retirement savings. I would not have qualified for it if I had made another $5k in income or was not Head of Household. Tough criteria to meet. Interestingly, I had to stop using the H and R Block software halfway through my tax return because it wanted me to upgrade in order to help me with my Savers Credit, which I discovered was entirely stupid. It told me I would only get a $200 credit also, as it wasn't factoring in the Roth IRA. Thank goodness I went and printed out the form and discovered my credit was much much higher, about 10% of the amounts that I had contributed to both accounts.

     I chose the standard deduction. It's $19k for my income bracket, which since my property taxes were low wasn't that much of a big deal.

     I cat wait to get my tax return back. I am going to use the money to fuel this year's Roth IRA contribution.

What is an ESPP and what can I do with it?

     I have been working for Megacorp Hospital Chain for several years now, and I have failed myself in taking advantage of one of their biggest perks. Not just drinking all the coffee, eating all of the doughnuts and peanut butter and jelly sandwiches, but rather, the Employee Stock Purchasing Program.  

     I guess I didn't try to learn about it sooner because I couldn't figure out why anyone would want to own stocks of the company, as if that was some kind of company gimmick to make employees more invested and work harder. While I still believe that to be true, what I didn't know at the time was that you buy the shares of your company at a 10% discounted rate. Or at least, that is what Megacorp Hospital does. There are no requirements for how long you have to hold onto the stock, and the shares are bought by payroll deduction. You have to use their broker though, which is unfortunate.

     The coolest thing about Megacorp Hospital shares is that they are dividend bearing, not that I plan to make a fortune on it. 

     At the beginning of November I enrolled in the ESPP for a total of 2% of my wages. That may be too much, but I can always sell the stocks and get that extra 10% bonus and reinvest in something else. Which I will no doubt have to do, because one does not want to be too invested in one particular kind of stock, like healthcare.

     Some people would say that the best time to sell your shares of company is on the day you receive them, because one cannot predict volatility in the market. That might be a wise move unless you think your company is only going to increase in value.

What is a SEPP distribution and what can I do with it?

     I think that the idea of SEPP distributions is just life changing. SEPP stands for substantially equal periodic payments, and it is a way of accessing your 401k or IRA monies before the age of fifty nine and a half. More importantly, it will not incur any penalties to do so, though the distributions are taxed as income.

     What is this? How come I have never heard of it before? Maybe because it has a lot of rules, most of which are mant to keep you from doing this. For example, once you start using the distributions you can't turn them off until 5 years have passed or you reach the age of fifty nine and a half, whichever is longer.  So if you start using the distributions at 58 you have to continue to use them until 63, no matter what. 

     Why would anyone want to do this? Well, I can see two possibilities reasons. One, the person becomes disabled and wants to boost their income by using the 401k money sooner rather than waiting. Two, the person is trying to retire early and this is one method of accessing the 401k money.

     So let's say I become disabled tomorrow. Don't scoff, I drive a lot for my job and anything can happen.  After I get home and discover I can no longer work I decide to use my 401k to cover my expenses, forever. This decision can't be taken lightly, because you basically can't turn it off, and it will slowly drain away your 401k until there is nothing left. If I put my information into the calculator here I get

-- $98K, the average amount of money americans have in their retirement accounts

-- Interest rate 0, for the minimum distributions.

-- Life expectancy, I am 42 now and plan on living until 78, the average life expectancy for a woman. That would be 36 years.

     And calculated using the IRS guidelines, the amount comes out to be... $2,722.22. Underwhelming to say the least. 

But two thousand dollars is more than enough money to pay the property taxes, and the remainder would be a good amount to save every year to cover costs of home repair. It's not nothing. It could prevent someone from being homeless. And as a survivalist, I feel like this is pretty cool information to have.

     One kind of excellent lifehack for this idea would be to have several 401ks or IRAs and use the SEPP on just one of them. That would let you have your most basic expenses covered by the 401k that the SEPP is attached to, and the other 401k is the one you will use for discretionary spending say at the age of fifty nine and a half. You could even roll your 401k over into two or three tradional IRAs, with one of them paying out the SEPP to cover your housing and utilities and food forever,  allowing you to retire early, or at least fee confident that you could if you wanted to do so.

     What are your annual expenses, and what would you have to have in savings to achieve them? This is a great question, and it's individual for everyone. Assuming I have no car and bike or bus everywhere I need to go, also assuming I'm not paying for all the children's costs, mine would be, let's see, $1300 for property tax, $600 for phone, $900 for electric, $600 for water and sewer, $4800 for health insurance, guessing $2400 for food. That comes out to $10,600 with no car. Much less than most people I am assuming. 

Putting that into the calculator you would get

$384,000.00 needed for early retirement.

     Kind of sobering numbers. Something to think about.

Real Estate Investment Trusts

     I would really like to start learning more about Real Estate Investment Trusts. They are not like traditional real estate investment, where a person owns a house and rents it out in some way like traditional lease or air bnb. The traditional way seems extremely messy and time consuming, plus frustrating when you have to clean up after tenants who leave a lot of broken furniture and garbage. The houses in my neighborhood are like this, it seems whenever I see someone moving out from my neighborhood there is a yard full of broken furniture and trash bags sitting in the easement.

     Real estate investment trusts are an investing tool. They are companies that own and usually manage income producing properties. And to avoid income taxes, they distribute 90% of their earnings to their investors. 

     There are private and public REITs. For simplicity sake, I am only going to focus on the publicly traded Trusts.

     The NAREIT website has a complete list of REITs, and you can sort it by public and private. 

     So my plan is to invest in senior living REITs, particularly any that involve those big 55+ apartment complex and independent living facilities. I know that people are saying there are going to be fewer and fewer retirees utilizing those resources, but from my perspective I just see more and more people moving there. I see a lot of family disconjugation and seniors unable to take care of their homes, and these senior living complexes are a perfect solution. 

     I can also see the benefit in investing in hospital and medical office real estate. They seem like pretty reliable tenants. 

     I'm conflicted about commercial real estate. Seems like there's plenty of vacant spots all over town.

     It would be interesting to invest also in residential, as there is definitely a current demand for housing. That's why three adults and a toddler live in the two bedroom house next to mine. 

     The best website that has an active index of REITs is the NAREIT, where you can sort all of the known REITs by public versus private and what class of real estate they specialize in.

     

Roth IRA Conversion Ladders

      I definitely need to learn more about this idea. I really like the concept that you can withdraw at any time to help pay for health insurance costs.

https://www.investopedia.com/how-roth-conversion-ladder-works-5214808

     Over the years, I have been religiously placing the maximum amount of after tax money into Roth IRAs, which I had thought was the smartest thing to do. As long as it sits in an account somewhere for I believe 5 years, you may withdraw the bulk of it to use as you please. In the past I have only ever withdrawn the money once, and that was to pay down on my mortgage. Some would say that was a bad move, but ultimately it set me up a lot closer to my financial goals than you would think. And if you figure out what your future costs of living are going to be, then you can set yourself up to withdraw that amount every year. Or most of the amount.

     Recently I learned about the Roth IRA conversion, which is a way to move money out of a 401k (pretax money) and into a Roth IRA (post tax money). Why would you want to do this, as you are going to be taxed on the distribution as if it were income? The truth is that you wouldn't want to do this move if you were working and earning income, as it would raise your taxes. You would want to do this if you are retiring early and have no income, but you want to use your 401k money to live off of. You would withdraw just the money you need to live from for each year, then it must be held in the Roth IRA account for 5 years to avoid penalties. During the first 5 years you would have to live off some of your other invested money before your 401k turned Roth IRA money becomes available. And each year you would rollover another future year of living expenses to be held for 5 years and then used. Doing this conversion does incur income tax burden, meaning, you will have to pay income tax on it as if it is income.

     Sometimes it can help to see some numbers associated with something like this. Here is a graphic I found on the web, this assumes your annual expenses are about $50k. I have already worked out my potential future annual expenses assuming I don't move and don't have a car Mr. Moneymoustasche style, is about $10k, with the bulk of that being the cost of health insurance and food.

     I find this trick to be ingenious, as you are not normally allowed to take any distributions from your 401k until age 55, as long as that is your current job you are retiring from, or 59 1/2 otherwise. 

     I tried calling my 401k company and rolling out some of my money into a self directed IRA or conversion, but they wouldn't let me! They said I was too young. But they also said if I was a former employee I could do whatever with the money. Way to go, hospital organization, why don't we just encourage healthcare workers to leave by holding their 401k money hostage and not allowing them diversified investments? Whoops was that out loud?