The epic and unprecedented pandemic-related drop in the US stock market has been punishing. And the punishment has had no prejudice.
Indiscriminate selling led to even the highest-quality stocks dropping swiftly and significantly.
Indeed, my own FIRE Fund, comprised largely of blue-chip stocks, saw almost $100,000 in market value wiped out between early March and early April.
Now, I didn’t actually “lose” any money. I haven’t sold stocks. So it’s nothing more than a fluctuation that makes certain numbers appear smaller than they appeared before.
Still, it’s a pretty massive haircut in the collective market value of my investments.
What’s interesting about it is, that near-six-figure drop represents years of capital gain that’s been slowly building. Years of capital gain wiped out in a matter of weeks.
Stocks tend to use the escalator when they go up. But they sure like to use the elevator when they go down.
What effectively happened here is that I was forced to give a “refund” of that capital gain on my investments.
I had the capital gain – capital gain that took years to store up. Then it was quickly clawed back from me.
This is a perfect example of why I don’t rely on capital gain and selling stock to pay my bills.
Instead, I rely on the growing five-figure dividend income the Fire Fund generates on my behalf.
While the market value of the Fund saw almost $100,000 disappear in short order, the dividend income the Fund generates fluctuated by less than 2% over the same time period. And with a COVID-19 lockdown in place, my personal spending has gone down disproportionately. That’s led to an even better free cash flow situation than I had before.
Furthermore, that capital gain “refund” that I was forced to give was not asked of me when it came to my dividend income.
To give you perspective on this, I recently recounted how my lifetime dividend income tallied up to over $70,000.
That’s more than $70,000 in passive dividend income I didn’t work for.
Not only that, this income is exponentially growing to the point where it took less than half the time to more than double the dividend income.
It took me seven years to get to $35,000 in lifetime dividend income. Seven years of blood, sweat, tears, hardcore savings, and diligent investing.
It then took less than three more years to get to $70,000 in lifetime dividend income. Three years of sitting back, relaxing, and engaging in pursuits I’m passionate about.
Those three years of enjoying my life have been possible because I achieved financial freedom at a young age by taking advantage of dividend growth investing. This is something possible for just about anyone out there, which I thoroughly detail in my two best-selling books: The Dividend Mantra Way and 5 Steps To Retire In 5 Years.
Collecting $70,000 in “free money” is pretty cool.
But what’s even cooler?
I’ll tell you.
That money is mine to keep. Forever.
Capital gain, on the other hand, isn’t mine to keep.
(Not unless I become a trader, lock in gains (and losses!), try to time the market, and start buying and selling stock regularly. Said another way, not unless I want to start quickly going broke.)
There’s no refund on dividend income.
That $70,000+ I’ve collected over the last 10 years is mine to keep forever. Nobody is trying to claw back that money. And seeing as how I’ve been paying bills with that money over the last few years, that’s a good thing. Otherwise, I’d be in trouble.
It’s not like Coca-Cola Co. (KO) is calling me up and asking me to pay them back for all of the dividends they’ve sent me over the last 10 years.
But a good chunk of the capital gain that’s been building up over the last decade in my Coca-Cola stock got wiped out. That was essentially “refunded” without my permission. And that’s the risk you take when you’re a long-term investor.
This “no-refund policy” on dividends is a great aspect of being a dividend growth investor. You can keep yourself invested in the market for the long term without losing any sleep, because you know your dividend income stream will be fairly intact and paid dividends are always yours to keep.
If you’re someone who relies on selling investments to pay your bills, you’re almost certainly selling off investments for much less money today than you were even just two months ago. That means you have to sell many more shares than you did before just to keep your income relatively stable, accelerating and compounding your woes. Not a good situation to be in.
On the other hand, the blue-chip companies I’m invested in are still by and large paying their growing dividends. My dividend income has been minimally affected thus far. That said, I openly acknowledge that more temporary dividend suspensions and even cuts could be ahead.
However, even with a dividend cut – an act taken in order to make sure a business is liquid enough to be around for the recovery – I know for sure that I won’t be asked to refund back any prior dividend payments.
Full disclosure: I’m long KO.
What do you think? Does knowing there’s no refund on your dividends allow you to sleep better at night? Is it nice to know your dividend income is yours to keep forever?
Thanks for reading.
P.S. If you’d like to successfully invest in high-quality dividend growth stocks over the long term, check out some fantastic resources I personally used on my way to becoming financially free at only 33 years old!