Teaching my kids – Part 8: Why dividend investing

I will be writing some posts to try to educate my kids. I know they are still very young (5 and 7) but it is never too early to start. And they can read these blog posts later on in life πŸ˜‰ (This is probably the case, because they don’t speak or read English very well at this moment – You got to love an understatement!).

This is another blog post to keep the β€œsnowball of knowledge” rolling.

I think when you educate kids about money, they will benefit from it for the rest of their lives. Or as the saying goes: β€œWhat is learned in the cradle is carried to the tomb”. And to educate your kid is your responsibility as a parent.

I use a computer for my research, writing and keeping track of my Vrijheid Fonds. This computer is located downstairs between our living room and dining room. So my kids see me enjoying my hobby at my computer. The oldest one asked me some questions lately about investing. For a seven-year-old kid these were some good question (proud dad!). After telling what investing is all about. And explaining some different type of investing, the question popped about: Why Dividend investing?

When a healthy company makes a profit, they can decide to give some of these profits back to the owners of the company, e.g. the shareholders. The board of directors usually determines if a dividend is paid or not.

When the board of directors has decided to pay dividend, they will propose this at the annual shareholders meeting (ASM). When the vote on this proposal during the ASM is positive, the dividend will be paid.

Dividend stocks are stocks that pay dividends. These dividends can be paid in cash or in shares. So if you own 1 or more dividend stocks, you will receive dividend. Receiving dividends is like collecting interest on money in a bank account. There is nothing to it. Everybody can do it!

It’s very nice, but not exciting. Or as Charlie Munger once said: Dividend investing is like watching paint dry of seeing grass grow. πŸ˜‰

Dividend stocks offer several advantages over non-dividend stocks:

  1. They offer a steady flow of passive income. And you can decide what to do with this cash (reinvest or spend on something else). And when you decide to reinvest, you will let your snowball get momentum.
  2. You will have two ways to realize a positive return on your investment (share price rising and dividends). And yes I love this, because this way I have a higher change of making a profit!
  3. Companies that pay dividends are in general more mature and stable than companies that don’t. I once read a very nice quote on this matter: β€œOnly when the company has attained a sustainable level of on going profits does its board of directors vote to pay dividends. In addition, the need to pay dividends tends to make the management more accountable to shareholders and less prone to taking foolish risks”.
  4. Dividend paying stocks are less volatile in the share price (e.g. a lower Beta).
  5. When you are in a bear market, the dividends help offset any loss from drop in share price (or even help you to make a positive return)

These five advantages are for me the major reasons why I love dividend investing. Okay it may seem boring, but it gives good result. Just look at my story on this website or on website from other DGI’s.

This is my eighth blog post about teaching my kids. I hope my kids at the age of say 18, have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.

Do you talk about dividend investing with your kids? And what other type of investing do you discus? I like to hear from you.

And will you help me to get the β€œsnowball of knowledge” rolling?




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