Dividends may not be the most exciting topic for teens or young adults, but that doesn’t mean young investors shouldn’t pay attention to them. Dividends are cash payouts that large, well-established companies provide shareholders as a proportion of their revenue. The types of companies that offer dividends are typically those that have stood the test of time, offering modest, stable, and oftentimes increasing returns even through recessions, cyclical shocks, and now a global pandemic. However, dividends are generally seen as safe investment strategies reserved for older, risk averse investors like retirees. But today’s young investors can benefit even more from dividends than their cautious elders.
Young investors have time on their side, which lends itself to the potential for building a considerable amount of wealth through dividend reinvestment. Reinvesting cash payments back into the dividend-paying companies creates a compound wealth effect while seeking maximized return over time. Because young investors have more time for their wealth to compound, the upfront investment can be much lower than if they wait until retirement to play the dividend game, making dividends an accessible way for young investors to build wealth passively with little downside risk.
The way people make money in the post-pandemic world has shifted drastically, with more income originating from infinitely creative sources. The number of people working part time rose by 1.2 million1 in December and January over the previous months, most of whom are doing so by choice. That accounts for a staggering 16.3% of the workforce1 choosing to work 35 hours or less per week. We may therefore be in the era of the side hustle, during which passive income plays an important and attractive role in a person’s financial plan.
While dividends are most commonly reinvested as a set it and forget it strategy, they can also be used as earned cash without the investor ever needing to sell a single share. Just as retirees use dividends to supplement their retirement income, young investors in the workforce can use dividends to reliably supplement their occupational income regardless of stock performance. Therefore, even the most extreme risk takers could benefit from adding the immediate positive returns of dividends to their financial plan.
Speaking of risk, young investors tend to focus on growth stocks, particularly in the tech industry. They might think of dividend-paying companies as old-fashioned with no growth trajectory, but that myth is false. Not only can dividends be more reliable than growth stocks, but they also can outperform them over time. Between 1990 and 20152, dividend stocks outperformed growth stocks in every market cap category while experiencing 25% less volatility over that same period.
To prove dividend-skeptics wrong, there are several companies in the TrueShares Low Volatility Equity Income ETF (DIVZ) that are pursuing a growth strategy while offering consistent dividends to shareholders according to portfolio manager Austin Graff3. Johnson & Johnson, for example, is becoming a higher growth company in its pursuit of the medical device industry while having increased its dividend payouts every year for the past 60 years. Verizon is another DIVZ holding and, as one of the top companies in the telecom industry, has a significant growth trajectory by providing vast networks of data infrastructure.
These are just two of the thoughtfully selected 25-35 holdings that make up the concentrated DIVZ ETF. To view the full list of holdings, please visit www.www.true-shares.com/divz. Dividends like those offered by DIVZ can suit any long-term investor, of any age and risk level, interested in immediate positive returns, cumulative growth, and stable passive income.
Dividends are not guaranteed and can be lowered or eliminated by the issuing company.