An interesting comment came through the blog the other day.
It was left by someone new to investing. They’ve bought a few stocks now. And this person is happy that those stocks are, thus far, all “in the green”.
That means the stocks were sporting market values higher than the prices paid. So there’s capital gain on the table.
You pay $50 for a stock. Now it’s worth $51.
Not so fast.
If you rely on “seeing green” to make you feel good, you’ll likewise fall into the trap of being angry when you “see red”.
Green is good. Red is bad.
This potentially harmful way of looking at the stock market is short-termism, and it’s not helpful to long-term wealth building.
Once you realize how little these green and red fluctuations matter, and once you see the true meaning of “being in the green”, you’ll be better able to ignore market noise.
Green Doesn’t Mean A Thing, And Red Is Dead
When people ask me about stock prices going up and down, and how that relates to being in the green or red, I have a saying (that I came up with) for them:
Green doesn’t mean a thing, and red is dead.
What this means is, neither green nor red have any connotation for me. They simply have no relevance to my day-to-day life.
If, say, stock in Wells Fargo & Co. (WFC) drops by 2% (or whatever), I have no idea as to why I’d care about that.
Likewise, if my entire stock portfolio drops in value – even significantly so – from one month to another, I have no clue as to why that would matter to me.
It’s not like I walk around with a number hovering over my head, showing my fluctuating net worth or portfolio value in real-time. Nobody in real life cares about any of this. I don’t go down to the coffee shop and talk about fluctuating stock prices with my barista. Someone doesn’t care more or less about me based on these numbers. Being green or red has absolutely zero impact on my life. It’s practically meaningless information.
I can tell you, however, what my barista will care about.
She’ll care about collecting my money for the iced caramel macchiato that I order.
And guess what?
The money that pays for that coffee (along with just about everything else in my life) is pretty much always “in the green”.
Dividends Are (Almost) Always “In The Green”
Let’s get to the crux of the matter here.
Stock prices fluctuate. Every day. Wildly so.
This isn’t inherently a bad thing, either. Short-term volatility is often a long-term opportunity.
But dividends don’t fluctuate, wildly so, every day.
In fact, they barely fluctuate at all – except for when they’re increasing.
Indeed, I’m a dividend growth investor. I aim to invest in companies that have lengthy track records of increasing their dividends year in and year out. Many of the companies I’m invested in have been doing so for decades.
And when you own a collection of world-class businesses that are pumping out growing dividends like clockwork, you practically can’t help but be “in the green” constantly.
I’ll illustrate this with my most recent portfolio update.
You can see in the FIRE Fund update for November 2018 that my early retirement dividend growth stock portfolio dropped in market value by over $13,000 during the month of October.
It was actually down by something like $10,000 in one day last month – and I only knew that because I had to log into my account that day in order to access research reports for an article I was writing at the time.
Bleeding red! Oh, no!
See, none of that matters. It doesn’t have anything to do with my everyday life. The only impact it might have is in the emotional sense – if I let it get to me. But I don’t.
Being “in the green” or “in the red” only matters if/when you sell stocks. It’s all on paper until then.
Since I won’t ever again sell another stock, these values don’t matter all that much to me. I’d usually prefer to see lower stock prices in terms of ongoing capital deployment and corporate stock repurchases. Otherwise, I don’t care.
Neither should you.
Meanwhile, and more to the point, you can see in that same portfolio update that the Fund experienced five separate dividend increases. The likes of United Technologies Corporation (UTX), Visa Inc. (V), and VF Corp. (VFC) all decided to give their shareholders (including me) a “pay raise” – bigger dividends that are funded by their growing profit.
Those dividend increases came about with no input on my part. I didn’t have to lift a finger or invest a dime.
It was totally effortless, yet the annual dividend income expectation rose by more than $36.
That might not sound like much, but it’s on par with investing just over $1,000 of my own money at a 3.5% yield, so it’s actually pretty significant. And this was a relatively light month for dividend growth for me.
Dividend income supports my life. I rely on that passive income in order to be and stay financially free.
As such, my freedom actually improved last month. My flexibility increased.
If I were only looking at the portfolio value, I might be bummed. But there would be no logical reason to do that. The very thing that underpins my life actually got bigger and better. That’s cause for celebration, not depression.
Dividend Cuts Put Into Perspective
So I want to note that dividend income is almost always in the green.
Why do I say almost?
Sometimes a dividend cut or elimination will roll around. Or a dividend might stay static for a year or two.
Businesses operate in the real world. And the real world has its ups and downs.
But that’s why we diversify.
I own equity in 114 different companies.
At any given time, one or two or three businesses might not be doing all that great. But the other 110 or so will probably be doing quite well.
Likewise, if a dividend cut rolls around, I can sleep well at night knowing that the dividend raises from the other 100+ companies will quickly make up for that – putting me right back “in the green”.
Indeed, that ~$36 increase in my dividend income last month would have, for instance, offset my dividend income from Starbucks Corporation (SBUX) being cut in half (which probably has a 0.01% chance of happening anytime soon). I currently collect $72.00 in dividend income annually from Starbucks.
Said another way, if Starbucks would have announced a 50% dividend cut last month (as unlikely as that would be), I still would have been “in the green” during the month of October. My annual dividend income expectation still would have increased – and that’s before factoring in any stock purchases on my part.
Actually, my investment in Travelers Companies Inc. (TRV) could have completely disappeared last month, yet I’d still be “in the green”.
Let’s just imagine for a moment that Travelers suddenly and inexplicably went bankrupt last month. At the drop of a hat. Just like that. Wouldn’t happen. But let’s just imagine for the sake of argument.
My lifestyle wouldn’t have been affected at all.
Well, my dividend income during the month of October would have still been “in the green”.
Travelers pays me just under $31 in dividend income per year, yet the aforementioned dividend increases came in at over $36. So I would have still been ahead. And everything I pay for in life would have been that much more easily covered.
I’m diversified to the point to where entire Fortune 500 companies can suddenly disappear, yet I wouldn’t even feel it.
And this is why diversification is so, so important.
Moreover, this is looking at things only on a monthly scale. I’m using last month to make my point because it was such a volatile month for stocks. My portfolio’s value dropped rather significantly, making this discrepancy between asset values and dividend income that much clearer.
But you should really be looking at things on a yearly scale.
And when you look at the numbers like that, assuming you’re properly diversified, you’ll probably never be “in the red” when it comes to your dividend income.
My portfolio could very well drop in value from one year to the next, but I’ve never once seen my annual dividend income drop from one year to the next. I doubt I ever will.
I wanted to write this article so that investors, especially those new to investing, don’t get caught up in the game of paying attention to which stocks are “in the red” or “in the green”.
Instead, pay attention to what’s almost always in the green – growing dividends.
If you’re playing your cards right, the very thing that will underpin your FIRE should be robust and diversified enough to always be in the green – even when (not if) those bumps in the road pop up.
Full disclosure: I’m long all aforementioned stocks.
What do you think? Are your dividends almost always “in the green”?
Thanks for reading.
Image courtesy of: digitalart at FreeDigitalPhotos.net.
P.S. If you’d like to achieve FIRE and live off of green dividends, check out some excellent tools and services that I personally used on my way to becoming financially free at 33!