What Are Dividends?

9 min readFeb 19, 2021

Investing your money is a long-term committment. Short profits are nice, but real growth is in the long run. This is without a doubt the hardest obstacle you need to overcome in order to begin your journey. The psychology of working hard now for a reward much later is inherently challenging for humans to understand.

Here’s my [not legally binding] promise to you: if you can overcome the difficulty of setting aside money for later, you’ll slowly — but surely — grow your money.

In the passive investing world, there are 3 basic ways to manage your money:

Stash the cash in a bank.
Invest in stocks that will grow in the future.
Invest in stocks that will pay dividends over time.

Stash the cash in a bank.

We gotta get rid of this option. Saving cash is costlier than you might think: due to the rate of inflation, stashed cash in a bank loses roughly 1–2% of its value per year. Even with your banks interest rate (usually 0.01%–0.03%) you’ll actually be losing money that sits in a bank.

Only keep enough cash/money for your immediate needs (groceries, bills, general spending, etc) and your emergencies (illnesses, veterinarian bills, car repairments, etc).

Invest in stocks that will grow in the future:

This one is easier said than done. If you buy a stock today for $100, and in 30 years that stock is worth $10,000 then you’ll have made $9,900. The hard part is figuring out which stock(s) will grow!

Pro Tip: If you are paralyzed by choice and can’t determine which stock to pick, consider investing in an ETF that tracks the total market performance, such as $VTI. For more information, I wrote a blog about this you can read later.

Depending on how much you start with, and how often you invest your money, your growth could be exponential!

Obviously the challenging component is picking the right stocks whose value will grow in the future. If you trust the company will succeed in the long run, then it’s a good buy.

Invest in stocks that will pay dividends:

Dividend stocks are classified as stocks that pay a higher dividend than most. While dividend payouts used to be more common in the past, there are still many stocks that pay high dividends in today’s market.

A Stock (commonly referred to as a Share): is a piece of ownership of a company. Buying 1 stock gives you 1 share of ownership of the company you are investing in. This entitles you to make votes and decisions (weighted by how many shares you own) on various aspects about the business’ growth, leadership, and developments, as well as an entitlement to a portion of the profits made by the company. This portion of profit is called a dividend.

A Dividend (sometimes referred to as Yield): is a payment made to you by the company whose stock you’ve bought. It’s basically your annual paycheck for being part owner in the company. The most common practice is to use these dividends to reinvest back in the stock, thus growing your stake in the company, and earning higher dividends in the future. This is called dividend reinvestment (drip).

Let’s say you bought $100 worth of stocks in $IBM that has a dividend yield of 5.45%. This means IBM will pay you $5.45 for every $100 that you’ve invested in them each year. If you had invested $200 then your annual dividend would be $10.90, or $300 would yield $16.35, and so on.

Dividends act as a form of incentive for buying, and keeping, shares of a company. When more people buy and hold onto their stocks, the value of the company increases, and the’re able to use those funds on new developments. One major goal in Capitalist America is to increase shareholder’s profits. As such, company’s will typically pivot their business models to reflect something that provides stable growth and higher earnings.

Some companies choose to pay higher dividends than others. These decisions are determined based on the company’s particular financial direction: do they want to allocate funds to pay their investors, or do they want to reduce dividends and allocate funds towards growth and development?

What’s the strategy on getting rich?

Again, the first thing you do is take the cash you’ve earned and, assuming you have emergency expenses saved, invest it in the stock market. And before you ask, no one knows which stock is the best one to buy.

There are always going to be new companies, new sectors, and new methods to invest money. Traditionally, investing in the entire stock market (using an ETF such $VTI or $VOO) will give you an average of 8–10% return per year. Obviously, this doesn’t compare to the potential performance of individual companies such as $TSLA (800% in 2020) that soar beyond any normal stock. Picking individual stocks is significantly riskier, and often glorified by survivorship and hindsight bias, but has the upside of potentially higher rewards.

The strategy I recommend everyone should do when they begin investing:

First, open an Individual Retirement Account (Roth IRA) with an online broker with very low fees. I recommend using something like Wealthfront, where you can deposit your money and then they’ll manage your investments! They will make investments and rebalance your portfolio depending on your age, goals, and risk tolerance. You can set an automatic deposit each month, sign up for dividend reinvestment plans, and tax loss harvesting to get as much return as possible. I’ve been using them for 5 years, my account has grown 110%, and I highly encourage you to do the same!
Second, open a ‘fun’ investment account with an online broker such as Robinhood, Webull, TD Ameritrade, or Fidelity. There are many choices out there, but Robinhood is the most commonly used brokerage service simply for the ease-of-use and their user-friendly interface. This investment account is where you can risk a small amount of money and try picking out stocks you think will ‘beat the market’. I call it the ‘fun’ investment account because it gives you the opportunity to potentially pick the next $TSLA without risking all of your hard-earned Retirement Account money.

If you follow this strategy, you’ll build up a nice retirement portfolio that will grow for many years, earning returns from stock growth and dividend reinvestments. You’ll also have another account (Robinhood, for example) that you can use to invest in riskier stocks for the chance to grow rapidly.

A Tip on Stocks that Grow: If you bought $100 worth of a stock that grows to $300 and you don’t know if you should sell or hope for more growth, consider selling a portion and letting the rest ride. This is referred to as playing with house money because you’d sell enough stocks to cover your initial investment, and then the remaining stocks

Here’s what I think will grow in the future:

First and foremost, I am not offering financial advice nor investing suggestions on which stocks to buy. Please research these sectors on your own before making investment decisions.

Marijuana. With the US federal dpt. moving towards legalizing MJ, I think a lot of companies will try to make headway as the leaders in the industry. The upside for medicinal, recreational, and hemp usage will be monumental. However, there will be a lot of volatility amongst the publicly traded companies as they compete for market capitalization.
Battery Technology. As we continue to push towards cleaner energy, electric vehicles will continue to become a major pivot point for car manufacturers in the 21st century. But rather than buying stocks in car companies (although you could do this as well), I think investing in companies that develop the technology for electric vehicles is a better option. Currently, one of my favorite ETF’s on battery technology is $LIT. I own between 2–20 shares of $LIT and I will not be selling them for at least a decade.
Cryptocurrency. This is not another post about bitcoin being the future. However, the concept of cryptocurrency, rather than the individual bitcoin, has a lot of potential. There is a lot of risk and volatility in buying things like Bitcoin, LTC, ETH, Zcash, etc., but there are some ETF’s that track blockchain technology. $KOIN, $BLOK, $LEGR are some popular ETFs. I do not have shares in blockchain ETF’s, but I do own positions in some different coins.
Semiconductors. Computers are always going to get faster and faster as our technology improves. Semiconductors refers to companies that produce the computer chips to enable them to continue improving. $SMH is one of the more popular semiconductor ETFs, though companies like $AMD, $INTL, $NVDIA, $APPL, and more also represent a large portion of computer chip technologies.
Biological Technology. I am very optimistic in the BioTech industry as advancements are constantly sought after. Powered by the pharmaceutical industry, as well as gene therapy, and cancer research and treatment I believe this industry will have significant growth into 2030. Some big name ETFs include $ARKG, $IBB, and $XBI

Disclaimers & Crap

None of these sectors are guaranteed to do well. I hope I’m right, but I could be very wrong. I encourage you to do your own research and come up with a strategy that works for you. As a disclosure, I do own positions in various aforementioned sectors because I believe in their future. Despite having initial profits, I don’t plan to sell these for some years. I will be dollar cost averaging a broad allocation into these various sectors, even if they continue to rise. Furthermore, this blog is for discussion purposes only and not to be regarded as investment advice. I hold no responsibility for your investment choices, and if you make any substantial investments you should consult a registered fiduciary advisor.

With that being said…

I love free stocks! And you should too! But I’m not an influencer and I don’t write these for a living, nor will I ever put them behind a paywall or bombard them with advertisements. I want to help you start your path for financial independence. As such, if you would like to start investing you should use this link to open an account on Robinhood. If you use my link, we both get a free stock (valued anywhere from $5 to $500) and I’ll be super happy. You’ll be super happy! And better yet, you get another free stock for each person that you refer. #gains