Over the last two decades, Index funds have been the default investment of choice. And with good reason, index funds are cheap, easy to understand, and should perform better than almost anything else over the medium to long term.
But there are other ways to invest, another one of those ways which can have the same effect as an index would be to invest in dividend paying stocks. For years I didn’t focus my investment dollars to dividend paying stocks. Instead, I did a combination of index and no load funds. The reasons are simple; and 2 reasons that stand out are:
- That’s what the crowd said to invest in: index funds. Any book I would read, or blog post I would read, or podcast I listened to said to invest in index funds. So I felt compelled to go down that route.
- The one big downside of dividends that I struggled with is that it takes a long time to build up enough of a consistent income so a person doesn’t need to worry about selling any shares if money were needed.
The other side of dividends that are so attractive.
- You basically get a default income stream. You can do the 4% rule but there is at least a modicum of work involved in that. Plus, it still is possible you run out of money.
- An easy way to know when you should no longer keep a stock, if you’re own individual stock is when they cut their dividend it’s time to sell.
- If you invest in individual dividend stocks you can get a monthly income. This is very easy to do through m1Finance.com. More on that later. The other option is to buy a mutual fund or etf such as: vanguards VHYAX, or VDADX, or and NOBL.
- Dividend stocks are typically less volatile than the overall market.
- But the BIGGEST UPSIDE of all: you’re not dependent of capital gains or the market fluctuations. That’s a huge mental boost.
I still invest in index funds. But that’s to create a base if I ever need money and that has become the only reason for me to invest in index based funds. Otherwise, the investments are going toward dividend paying stocks. Admittedly, I’m dipping my toes into dividend investing, but the psychological reasons for dividends were too great to for me to not do it.
