Tag: DRIP

Easy money… Why You Should Give a Hoot about Organic Dividends.

Save. Invest. Learn. Repeat.

Blue Lobster

So this blog post will fall under the “Learn” category. It’s just a tidbit of information about organic dividends to add to your investing armamentarium. Do with it what you will.

Long-time readers know that I’m a huge fan of dividend ETFs (exchange-traded funds). Since the start of my investment journey, I’ve relied on DRIPs (dividend re-investment plans) to re-invest all of my dividends automatically. I time my investment purchases to take advantage of each ETF’s ex-dividend date. I felt very smart about dividends. As always, the universe has much more to teach me.

Lately, I’ve been coming across the term “organic dividends” more frequently. Every time I see this term, I ask myself questions: What are these? Do I need them? If so, how do I get them?

First question – what are organic dividends?

From what I’ve gathered, organic dividends are the dividends that are generated when the dividend-issuing company raises the dividend-payout per unit. If I have 1000 units that pay me $0.10/unit in dividends, then I earn $100 in dividends. Fantastic! Those aren’t the organic dividends though.

When the company raises the dividend payout to $0.15/unit, then I get to benefit from organic growth in my dividends… My dividend increase directly as a result of the increased dividend payout. That $0.05 increase in the payment – from $0.10 to $0.15 – results on my dividend payment increasing to $150, without any effort on my part.

Instead of buying 500 more units to get that $150 dividend payment (=1500 units x $0.10/unit), I earned more dividends per unit simply because I own the units. Yay, me! In other words, I didn’t have to invest any money increase the amount of my dividend payment. Instead, my dividend grew organically because the dividend-payout increased. Essentially, I earned more money without doing any more work.

Mind blown! Organic dividends are as wonderful as my DRIP for increasing my dividend cash flow.

Second question – do I need organic dividends?

The short answer is “Hell, yes!”

My portfolio benefits anytime one of my dividend-paying companies raises its dividend payout. I can’t imagine a situation where organic dividend growth would be bad for me. Again, I earn more money without doing more work. Obviously, I’m going to like this fantastic feature of organic dividend growth.

Even if my taxes go up, so what? Dividends are taxed so much less than earned income. Getting an increase in my dividend payments, via organic growth, is similar to getting a raise at work. The organic dividends are way, way better than the raise, because the raise is taxed much more than the dividends are. The tax treatment of dividends is much better. If you want more details, talk to a tax professional.

If you’re fortunate enough to benefit from both organic dividends and a raise at work, then count your blessings, pay your taxes, and go on about your day.

Third question – how does one get their hands on organic dividends?

Well, my sweet… we have to go back to first principles to answer that question.

  • First, you live below your means. If your spend every nickel you earn, then you won’t have any money to invest. You need to have some disposable income to direct towards wealth creation.
  • Second, you automatically transfer a portion of your paycheque to your investment account every single time you are paid. Start where you’re at and increase that amount over time. I started with $50 every two weeks from my first part-time job. Now, I’m investing twice that much every day… on top of the monthly dividends that are automatically re-invested.
  • Third, you buy dividend-paying investments. I like to buy dividend ETFs, but there are also dividend-paying mutual funds and dividend-paying index funds out there. (Never forget that mutual funds are far more expensive than ETFs and index funds so you’re paying more to own them. You should probably stick to ETFs and index funds.) You can even buy stock in companies directly, if you think that’s best.
  • Four, set up a dividend re-investment plan so that your dividends are automatically re-invested for you every time you are paid.

You continue to live below your means so that you always have money to invest. The dividends will start as a trickle, then compound over time. Eventually, they’re a virtual waterfall showering you with money every year. The more you invest, the faster your dividend payouts will grow. When the dividend-issuing companies increase their dividend payout amounts, each of your ETF units (or stock) will pay you more money.

You cannot benefit from organic dividends without first having dividend-paying products in your portfolio. Never, ever forget this.

That’s it. That’s the post. Organic dividends are a great way to increase your passive cash flow. You cannot control when they’ll show up, but you can definitely control whether you’re positioned to receive them. Do with this information what you will.

Building an Army of Little Money Soldiers

One of my life’s goals is to build a nice, solid flow of passive income without getting a second job. The way I decided to do this was by building an investment portfolio using a dividend-paying exchange traded fund (ETF). I think of the individual units in my ETF as Little Money Soldiers whose sole purpose is to acquire more and more dividends for me every month. The dividend income that I earn can be used any way I want, and right now I want it to fund my dream of financial independence.  Every single month, I add to my army of Little Money Soldiers by buying more units in my ETF and I send them out into the world to do their thing – they do it well. I don’t have to do anything beyond sticking to the plan of contributing to my portfolio regularly and watching my dividends grow. My Little Money Soldiers do the rest.

As a Singleton, my paycheque is the primary source of income in my household. Years ago, I’d heard about how smart couples of means would live on one income and bank the other. Ideally, the really well-off couples would bank the higher income and live off the smaller one. I envied such couples! The reality was that I was not in a position to live on 50% of my take-home pay. I wasn’t willing to live that close to the bone because I wanted to be able to socialize with my friends each month and do some travelling. When I learned about dividend income and started doing some blue-sky dreaming about how dividends could be used to supplement my income, I couldn’t buy them fast enough!

Dividends are a second income in my otherwise single-income household. Unlike married people in a single-income household, I don’t have a partner who can go out and earn some money if my main income source dries up. My monthly dividend income is financially akin to having a partner with a part-time job. If I were to lose my paycheque, my dividends could help me survive from one month to the next. Obviously, I would lose the benefit of the dividend re-investment plan (DRIP) because I would need the dividends to pay for my absolute necessities while I looked for employment. As a single person, the dividend income created by my Little Money Soldiers provides a certain level of psychological comfort because I know that, should I lose my current job, I will continue to have income until I find new employment and start getting a paycheque again.

Right now, my investment portfolio produces a part-time income. If I continue to invest on a regular basis and if I refrain from spending my dividends rather than re-investing them, then my investment portfolio will eventually produce a second full-time income for my household. I will have the financial benefits of an imaginary spouse/partner without the real-life drawbacks that come with sharing money with a sentient human. And unlike other side hustles that are regularly touted on the Internet, my army of Little Money Soldiers goes out to work on my behalf thereby allowing me to indulge my inclination towards laziness. I don’t have to do anything outside of my comfortable routine in order to earn this money. It’s all mine – it’s tax-advantaged – it’s automatic – it’s wonderful!

For the past 7 years, I have consistently been investing in dividend-producing assets. I’ve reached a point where I consistently receive a 4-figure dividend payment every month. And since I don’t spend the money, it is automatically re-invested on my behalf. (Check out this awesome article for a primer on how DRIPs are the next best thing since sliced bread: My dividend employee Steve.)

I was very lucky that my parents were interested in the stock market. Both of them invested on a regular basis so I knew that there was a way to make money without actually having to go to work. Of course, my six-year old brain didn’t quite grasp all the intricacies of what each call from my mother’s broker meant but he phoned on a regular basis. (As an adult, I’m quite convinced that he merely churned her account to generate fees instead of acting in her best interests to make money. Nowadays, my mother invests on her own through her self-directed brokerage account and she’s doing quite well!)

My father’s style of investing was much different. He introduced me to the concept of dividends, and bought me several shares in companies that are still around today. When I was in my early 20s, I opened my own self-directed brokerage account and used my initial principal to buy shares in the various Big Banks. Again, betraying my youth and lack of knowledge, my only criteria for which bank stocks to buy was whether the bank participated in a DRIP. If the answer was yes, I bought $1,000 worth of stock in the bank. To this day, those banks still pay me dividends every quarter. I freely admit that this wasn’t the smartest way to pick my investments, but I could’ve done a whole lot worse! Every one of those banks is still around and the stock price has grown over time. Buying those bank stocks was one of the best financial decisions that I’ve ever made, even if the reason underlying the decision was not well-founded.

As we all know, time waits for no one. I learned more and more about investing by reading books, internet articles & personal finance blogs. They were all consistent that the way to earn outsized returns was to be invested in the stock market. I had little interest in becoming a expert in the stock market but I appreciated that the best historical returns went to those who had equity investments. Buying stocks in companies that paid dividends meant I was investing in equity. Dividend payments were a passive way for me to earn money and to participate in the stock market – to me, it was the best of both worlds! I started contributing more regularly to mutual funds which paid me dividends, then I learned about ETFs and index funds and a light went off in my brain. Why should I willingly pay higher management expense ratios (MER) for my mutual funds when I could buy the same basket of assets through an ETF or an index fund for a fraction of the price?

So, after paying off my mortgage at 34 and becoming debt-free, I turned my focus to building my non-registered investment portfolio. I promptly found an index fund that paid out dividends every single month so it was time to say bye-bye to my mutual funds. I was still investing in dividend-paying assets but I would be paying a lower MER to do so. My new index fund would simply pull the money from my chequing account and the investment would be made. Making the switch was a no-brainer! I set up an automatic contribution from my paycheque to my index fund. My first index fund offered a DRIP feature and I was not responsible for re-investing those dividends into new units of the index fund every month. The dividends were DRIP-ped, i.e. automatically re-invested into more units of my index fund, rather than paid out to me in cash. It was fantastic!

Two years ago, Vanguard came to Canada and I started doing some investigating. Vanguard has very low MERs on their products. One of those products was an ETF that paid out dividends every single month, offered a DRIP feature, and had an MER that was much lower than the one on my index fund. This was a hat trick! I could get all the benefits of my previous index fund portfolio while saving money on the MER and accruing even more units of the ETF every single month. Sadly, Vanguard will not simply withdraw the money from my chequing account – I have to transfer money to my brokerage account. Big deal! For $9.95 a month, I’m paying a much lower MER and earning sufficient dividends which more than cover the cost of the monthly purchase. I spent 15 minutes opening my online account. Then I spent another 3 minutes setting up an automatic bi-weekly transfer from my paycheque to my brokerage account to fund each month’s purchase. I haven’t looked back. Every month, I buy more units in my Vanguard ETF after the last month’s dividend payment has been automatically re-invested.

Earning money through dividends is awesome. I don’t have to do anything other than purchase the underlying asset and the dividends flow to me every month like clockwork. In the words of my very wise hairdresser, it’s money that I don’t have to sweat for. What could be better than that?