Most investors try to beat the market. They try to invest in such a way as to generate better returns than the S&P 500 index or some other gauge of investing “success”. In fact, that’s the way most professional investors think as well. Probably because if they don’t meet their benchmark over the short term they’re probably going to be out of a job before they even get to the long term.
But what does beating a certain index over the short term really mean?
If you’re not going to need that money for years or even decades it doesn’t matter at all and, if you’re investing for current income, you should be invested in securities that aren’t particularly impacted by the rise and fall of the market anyway. The only thing concentrating on short term market performance does is take your eye away from the long term performance that will make or break your retirement savings.
Dividend investing is often contrary to the message you’ll hear from the media and especially from the talking heads on CNBC that make their living by concentrating on the ultra-short term. Here are several ways that the dividend investor’s mindset differs from that of many investors.
Focus on the Long Term
The performance of the rest of the market doesn’t matter to you as long as you’re reaching your own individual goals. If you know that a 7% yield on your investments will double your money every ten years (which it will) and you’re comfortable with that return then it doesn’t matter what the S&P or any other market benchmark is doing. Focusing on the short term diverts your attention from the reason you’re in the market in the first place which is to generate a low risk and steady stream of dividend payments.
Don’t Speculate
Investing is buying the stock of solid corporations that pay solid dividends and holding it for the long term. Speculation is buying the stock of a company that you hope will grow quickly so you can trade out of the position at a profit. The problem with speculation is that you have to be right much more often than you’re wrong which, given the dismal success record of professional and amateur stock pickers alike, is nearly impossible to do.
Hold Down Costs
Brokerages make their money by charging their customers for the trades that they execute. More customer trades equals more profit. But, beyond your brokerage’s incentive to motivate you to trade more often is the fact that moving into and out of positions frequently is not the formula for long term investing success. Even if those trades only cost you $10 a pop the damage you’re doing to your overall performance by trying to time the market will cost you much more in the long run.
Focus on Facts
Non-dividend paying stocks provide their value through a promise. That promise is that profits will be used to grow share price and investor equity will be returned when the stock is sold and capital gains are (hopefully) realized. Disregarding the idea that the only way to profit from owning non-dividend stocks is by selling them and not by holding onto them, this overall promise is based on the individual promises of everyone in the company from CEO down to stock clerk that they’ll be good stewards of your equity.
That’s a lot of promises.
Dividend stocks rely on facts. The fact that a dividend payment representing a portion of profits is delivered every quarter. The fact that company health can be measured by both the amount and growth of those dividend payments. The fact that a company which has faithfully issued dividends for decades is likely to continue issuing dividends going forward. The fact that a single dollar in hand today is worth more than ten that are promised to materialize at some unknowable and uncontrollable time in the future.
