Dividend income is the second pillar of my casflow triad. It is the most passive form of investing (buy and forget), you can start with small amounts of money (€500 would do it) and it is very easy to do.
The downside of dividend income is that it is hard to get oversized returns (10%+) and finding an edge over other investors is pretty tough. Also, from purely theoretical standpoint, companies would be better off repurchasing their stock or reinvesting their profits than paying dividends (case in point, Warren Buffett and Berkshire Hathaway).
As a personal investor, I still like dividends in my cashflow triad – they provide good diversification, are extremley passive (after buying a stock I do not have to do anything to receive my passive cashflow – just sit, wait or go cycling in the forest). My main reason for using dividend income in my financial freedom plan has to do again with Estonian tax law. When Estonian companies pay out dividends, they have to pay dividend withholding tax (currently 20/80%). After that, the money is completely tax-free for individual investor. So I can use my Estonian stock dividends to directly fund my day-to-day living expenses and not pay another dime in taxes. I like it! When I invest in foreign stocks, then I am a subject of 15% dividend tax (not to bad either!). So as of today, dividends are actually very tax-efficient way of funding one’s day-to-day living expenses.
When I started investing in dividend stocks, I focused on my home country stocks, because fees were lowest and dividend yields higher than most multi-nationals would offer (the other reasons were information advantage and home country bias). Later (in august of 2015) I started investing in US stocks as well using Interactive Brokers account.
My experience so far as been quite promising. My biggest position used to be Estonian water utility Tallinna Vesi. As of November 2015, I havd 24 000 shares (I owned 0,12% of the company) worth about €300,000. I received about €0,90 per share in dividend income in the middle of June (most European companies pay dividends once a year and usually late spring/early summer). My yield was about 11%. This dividend alone will cover most of my family’s basic living expenses for a full year 😉 Other dividend stocks in my personal porfolio included Olympic Entertainment Group (yields about 5,3%) and Merko Ehitus (yields also 5,3%). I have about €50,000 invested there and yearly dividend income in 2014 was about €2,500.
In 2015, I opened an investment account in Interactive Brokers and started to build dividend-stock portfolio there as well. Here my focus is in US and international stocks. IB gives me two main advantages over my previous broker – most notably much-much cheaper fees/margin interest and some extra security knowing my assets are not held next to Russian border but somewhere between London and NY. 😉 As of November 2015, my biggest positions are in Berkshire Hathaway (aka dividend stock that does not pay dividends), Apple, Exxon Mobil and Potash.
I also own some dividend stocks in my investment company’s account. I have position in Silvano Fashion Group (mainly because they have nice pictures on the cover of their annual reports!) that paid €0,10 per share in dividends in 2014 (tough year in Russia and Ukraine!) and I speculate in some Latvian pharmaceutical stocks (Olainfarm and Grindeks). I also initiated position in biggest ferry operator in the region – Tallink.
In 2018, I have done some big changes in my portfolio. First, I have cut Tallinna Vesi position down to 5000 shares. The reason behind this is their loss of dispute with Estonian Competiton Authority – they were forced to lower the tariffs and therefore have lowered the dividend as well (in 2017 the dividend was 0,54 eur per share).
As far as my €10,000/month cashflow goal, dividend stocks play important role. My goal is to get at least €3,000 monthly cashflow from personal dividend stocks (€36,000 per year after tax). That would easily cover my family’s day-to-day living expenses. In 2014 I achieved €2,000 monthly cashflow but my portfolio is very heavily concentrated in one company (over 85% in Tallinna Vesi). In last couple of years it has been a great decision, but after a great run you need to take some profits and diversify. Ultimately I would like to own at least 4-5 different Estonian dividend stocks in my personal account and have about 500,000 usd working for me in IB account.
The biggest change has been in building my IB forever growing dividend portfolio (FGDP for short). As of April 2018, it has 49 companies in it, lion-share (about 20%) is invested in Berkshire Hathaway and Apple. Mostly I look for Dividend Aristocrats and I start my shopping list based on Suredividend.com newsletter. So here it is, I proudly present my FGDP: