Building Wealth Through Dividend Investing
Dividend investing involves purchasing shares that pay out a portion of their earnings to shareholders. These payments, known as dividends, represent your slice of the company’s profits just for holding onto the stock.
In this blog we will look at the benefits of Monthly Dividend Income Shares.
Table of Contents
- The Compounding Effect
- 5 Benefits of Monthly Dividend Shares
- Using a PCA Strategy with Reinvesting Dividends
- How to Choose Monthly Dividend Income Shares
- Consistency is the Key to Success
- Monthly Dividend Investing Strategy
The Compounding Effect
Referred to as the 8th wonder of the world by Einstein, the compounding effect is about taking small sums of interest or dividends and reinvesting them.
The repetition of reinvesting grows the capital investment quicker and quicker. It is like a rolling snowball effect where the snowball starts small and gets bigger as you roll it.
When you reinvest dividends, you’re using them to buy more shares of the share, which in turn will generate even more dividends. It’s a cycle that can significantly accelerate the growth of your investment over time, harnessing the power of compounding to build wealth.
A look at historical data throws up an interesting fact: dividend-paying shares have often outperformed their non-dividend counterparts over the long haul. Consistent dividend payers are often used as a marker of a company’s financial health and stability, which can be a comforting sign for investors looking for less volatile share performance.
5 Benefits of Monthly Dividend Shares
When using a monthly dividend income strategy there are some benefits rarely spoken about.
- Reinvesting the monthly dividend will see the capital investment grow quicker.
- When monthly dividends are reinvested the annual yield is higher due to the compounding effect.
- It is the perfect strategy to use in a volatile and downward market as you can buy more shares as the price drops increasing the dividend paid.
- The average cost per share is reduced quicker meaning shares don’t need to rise much to generate healthy profits.
- Dividends can be partially reinvested providing both income and growth. Partial investment means income taken from dividends still grows each month.
Using a monthly dividend income strategy is a powerful way to even out the ups and downs of the share market while continuing to grow dividend income.
Using a PCA Strategy with Reinvesting Dividends
A PCA Strategy (Price Cost Averaging) is when instead of investing a lump sum to buy shares, a regular monthly amount is used.
The result from this is when the price goes down there is less risk to capital but more opportunity to buy more shares and receive more dividend.
As share price goes down and more shares are purchased the average share cost also goes down. The effect is that as prices rise they don’t need to rise as much to be able to sell the shares for profit.
As an example. If you are buying shares for £1 each and the price drops to 50p you get double the number shares. If investing £100 per month at £1 you get £100 shares with average price of £1. If the price drops to 50p you can now buy 200 shares. Total share holding becomes 300 with an average share price of 66 pence. If the shares go up to 67p they are in profit.
When you factor in dividends, buying more shares and receiving more income from dividends you have a win/win in almost any situation on the share market.
How to Choose Monthly Dividend Income Shares
Surprisingly, it is much easier to find monthly dividend shares that thought.
A quick search for the top monthly dividend shares on Google or other search engine will quickly provide some companies.
The next step is to check the history for paying dividends and what the percentage payment is against the company profitable income. Ideally, the percentage will be less than 100%.
If it is higher than 100% the company will likely get into trouble very quickly. If it is less than 100% the company is operating with a long-term stability structure.
Those couple of quick searches will provide several shares to invest in.
Consistency is the Key to Success
If you want to truly excel in dividend investing, consistency is key. Regularly contribute to your investments and don’t neglect to review and adjust your portfolio as needed. Even if you have to start small, your first attempt doesn’t need to be your last. By continually investing and optimizing your portfolio, the effects of compounding become even more pronounced.
I created a spreadsheet that looked at the benefit of investing £100 per month using an ISA for tax efficiency. In the spreadsheet, the returns were calculated using monthly dividend income shares that were reinvested.
By year 6, the dividend received was more than the annual amount invested.
Once this change took effect the investment grew exponentially. However, when a larger lump sum was invested it took longer to achieve this result by a few years.
Slow and steady offered the best results for Monthly Dividend Investing.
Monthly Dividend Investing Strategy
Monthly Dividend Investing Strategy using Price Cost Averaging is the easiest and most effect way of starting a share investment portfolio.
It is one of the safest strategies with key benefits for capital and income growth.
Taking less time than traditional share investment strategies it offers a simple but beneficial way to start a share investment portfolio
