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.
Great, right?
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!
Yawn…
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.
Guess what?
My lifestyle wouldn’t have been affected at all.
Why?
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.
Conclusion
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!
Great overview for new investors building their dividend income stream. In the past 10+ years I have been investing in dividend stocks, I can remember 2 cuts from companies I owned (COP and GE).
Do you ever sell a stock if the company were to announce a dividend cut? My philosophy is to sell when a cut is made but hold my stocks on a dividend freeze.
themoneysprout,
Gotta focus on the long-term income trend, which is what’s actually going to impact your day-to-day life. Short-term fluctuations on stocks is what trips people up, even though it doesn’t really matter.
As for selling stocks:
https://www.mrfreeat33.com/why-i-will-never-sell-another-stock/
Best regards!
Thanks Jason, I need to keep reminding myself the fluctuations don’t matter as I don’t plan to sell anyway. It’s true, the only figure that keeps going up month after month is the average monthly dividend received over the past 12 months. That graph always puts a smile on my face!
RK,
That’s the graph to look at. I get that same smile. 🙂
Enjoy that growing dividend income!
Cheers.
Jason,
I got 58 positions, GE cut its div practically to 0. Still way ahead, and continuing to crush. The twin concepts of diversification and long term planning / investing can be hard to impart on people. Those items are the friends of us, the little guys!
– Gremlin
DG,
Couldn’t agree more. Diversify and focus on the long term. The rest is just noise. My general emotionless disposition isn’t always a good thing, but it’s been handy as an investor. 🙂
Best wishes.
Hi Jason, thanks for your great post as usual. I also have the same view. Ups and downs in my total capital don’t matter to me, it actually create the buying opportunities at better prices. looking at my monthly dividends go up its what matter to eventually pay the bills. Drip and compounding will do the trick over time. Take care my friend and happy thanks giving. Omar
Omar,
Absolutely. Short-term volatility is usually a long-term opportunity. Meanwhile, it’s good to know that the passive income that underpins your life is steadily coming in – and growing.
Best regards!
Nice article and I actually really like this way of thinking. I’d say most times you are correct that your dividend income will not go down on a year to year basis, but in times of recession this will not always hold true. It might make a good article to research the history of the companies you currently own and see if there was an overall decline in dividend payouts during the 2008-2009 recession. Starting with 2008, S&P 500 dividends actually went down and took a few years to recover to the 2008 level. Obviously for the vast majority of times dividends do increase, but there are times when they do go down.
Cheers, Mark
Mark,
Well, it depends on how you structure your portfolio. Which businesses you invest in, and how diversified you are, will certainly have a lot to say about your income rising (or not) during a recession. As noted in the article, though, I strongly doubt I’d ever see my dividend income decrease on a YOY basis. Of course, I’m extremely diversified across some of the best businesses in the world. By the way, my portfolio is public. So you could freely take it upon yourself to back test it against the financial crisis, which would be about as tough a test as you could throw at it. That’s more of a generational type of event, however, so I find it unlikely that something like that would reoccur any time soon.
Cheers!
Hi Jason, Most people forget the late 1980’s thru early 1990’s Saving and loan crisis. Not s bad as the 2008 but it dragged on for years and was a hard time. So in my short life Ive been through 2 financial crisis.
The stock market has dropped HUGE many times but the trend over time is slowly rising prices, and for the most part dividend increases.
So with all that said I do believe your strategy is very good 🙂 diversify and don’t concern yourself with swings in the market.
Bob,
I’m sure there will be more crises to come. It’s human nature. But as long as you diversify and focus on what really matters as it pertains to “green” and “red”, you should be just fine. 🙂
Cheers!
Hey Jason, I did take your portfolio and back tested it by comparing 2008 annual dividends to 2009 annual dividends. Just for reference, the S&P 500’s dividends dropped about 16% from 2008 to 2009. Total Market (VTSAX) dividends dropped about 11%. S&P 500 was heavily weighted with banks/financial companies which took the hardest hit and were forced to dramatically cut their dividends because of TARP. Anyway, I took your whole portfolio and excluded companies which didn’t exist during that time frame and used a stock price at the beginning of 2008 to calculate how many shares you would have of each stock. This kept your portfolio ratios quite similar to what you have now. Happy to report your portfolio’s dividends increased around 4.6% from 2008 to 2009, so have to say nice job man!
-Mark
Mark,
Hey, that’s pretty neat. Appreciate the work!
4.6% is pretty solid considering the period of time in question, but past performance is obviously no guarantee of future results. That said, something like the Great Recession doesn’t come around very often.
Best regards!
Is it possible to get excel version of your portfolio?
SD,
Unfortunately, no. I’m actually not a fan of spreadsheets at all. If it weren’t for this blog, the portfolio spreadsheet wouldn’t even exist. 😂
Cheers!
I’ve read enough of Dividend Mantra that I can already do an impression of the naysayers who only skimmed through your article and never read anything about dividend growth investing before coming on and trying to tear your investment views apart:
“But Jason! You say that now, but you won’t be saying that when the stock market crashes and all your dividends are cut! That’s why you need to buy gold and/or get a job!”
How was my impression?
Sincerely,
ARB–Angry Retail Banker
ARB,
It’s funny you mention this, because I felt like this was a very Dividend Mantra-ish article to write. Took me back a few years.
That impression was spot on, my friend. Bravo! Encore! 🙂
Best regards.
Hey Jason,
There’s no question the aggregate result of owning a diversified portfolio of high quality dividend payers results in a rising tide over time. I’ve only experienced one dividend cut in the past nine to ten years and yet dozens (or more) increases over that same time period.
As you mention, even small increases that result in seemingly small forward income increases actually have a sizeable benefit when you look at the real cost of generating that level of income from net purchases.
Take care,
Ryan
Ryan,
Definitely. Those small increases might not seem like much at first glance, but they surely add up in aggregate. That’s especially true when you look at what kind of capital investment would otherwise be necessary to generate that same increase in your income. It becomes significant pretty quickly.
Best wishes!
Hi Jason,
I agree with you. The initial increment might not be significant at the initial phrase. However, it becomes notificable as time passes with the regular investment at intervals (while in employment).
It does not take much time as there is no need to monitor the share prices as the main concern is generated dividend in respect of dividend investment. One will channel his/her time to his/her interest which will enrich and enhance the lifestyle of the individual.
WTK
Hi Jason,
I think those that watch the value of the the investments they have are usually invested in mutual funds or etf’s or techs with no dividends ect.
I actually had a friend the other day ( they invest strictly in ETF’s ) very upset because the “value” was down, she looked at me wide eyed and said “Bob if this continues you may need to go back to work !”.
I took a moment for her to regain composure and then assured her I would not need to “Go back to work” and if they ( her and her husband ) began to diversify into into good quality dividend stocks they would be fine. I gave them a few of my choices then referred them to your site 🙂 I hope they make it over here it will help reduce the stress in their life for sure 🙂
Thanks for all you do 🙂
Bob,
That “go back to work” comment is funny. But I think that’s more pervasive and likely to be said in Western culture. I don’t receive that kind of feedback at all anymore, now that I live over here. The Thai people definitely don’t have a “work hard, play hard” mentality. And a lot of the younger Westerners staying over here for long periods of time are doing something online, or are otherwise trying to build a source of income that doesn’t rely on a job. I think the way people think about jobs and money is changing. It was weird for me to not have a job in the US. But it’s not strange at all over here. I quite enjoy that different mindset. 🙂
Best regards!