Mike McNeil is a patient man, and that makes him the ideal person to blog about dividend investing on The Dividend Guy, his blog about making money the careful way. Mike took a few moments to tell us all about dividend investing and how to tell whether it makes sense for you.
Why do you love dividend investing?
Dividend investing is simple: You buy companies with profits who share this profit with investors. A dividend is paid by a company when it makes profit and wants to share its wealth with shareholders.
Dividend investing doesn't require that you watch your computer all day. Most great dividend-paying stocks are blue chips that don't move very fast. Therefore, a sound analysis can be good for several years, and reading quarterly results is enough to follow your companies.
Dividend investing generates passive income. As long as you hold the stocks in your portfolio, you earn quarterly or monthly paid dividends, depending on the company. You have nothing to do, and you receive constant cash flow from your investments.
What are some misconceptions you find people have about investing?
Most people look at investing like it's gambling - a way of making easy money. They think they simply have to pick the right stock and it will skyrocket like Apple did, for example. I like to say that investing is not sexy at all. In fact, it is pretty boring most of the time and has nothing to do with the crazy life you see in the movies.
If you follow a strict set of investing rules, you will make money investing. However, this also means holding most of your investments for several years without doing anything. This is not exciting, but it works.
What are some useful ways to judge risk in an investment?
I guess the first thing is to do like Warren Buffett: Never invest in something you don't understand. Good investments are easy to understand and don't include all kind of twists. When you understand how a business makes money and how you can get your money back from an investment, this is usually a good sign that you are able to assess the risk attached to your investment.
For example, if you have never invested in a rental property, you might want to study all the positive and negative sides of this type of investment. This is the same thing that goes for the stock market; if you don't understand why Facebook is valued 83 times its revenues while Johnson & Johnson is valued at 20 times its revenues, maybe an investment in Facebook is not a good thing for you.
If somediv tells you they're skittish about investing in stocks, what would you say to them?
Do you think the price of gasoline will ever go down to $0.25/gallon? If you think it's impossible, then it's impossible the stock market goes down to nothing. Stocks are backed by real companies selling products and making money. If the stock market collapses, this means there are no more companies selling products and making money. This also means there is no need for gasoline anymore and the price will drop to $0.25/gallon. If you think it's impossible and the price of oil will continue to go up, you are right...and so will the rest of the stock market.
If you are well diversified, meaning not invested in the same stocks, and you keep your investments for the long term, you will likely never lose money. Investors who kept their money invested since 2008 are the best example.
What was the best investment you ever made, on or off the stock market?
My best investment was to buy my blog back in 2010. I'm making more revenues from this site than I ever made with any stocks. Running your own little business is always the best investment you can make!
What's the one thing you wish everyone knew about investing?
That the sooner they start, the richer they will become. Too many people focus solely on their budget or paying off debts, and not enough folks consider investing a part of their bi-weekly paycheck. I started investing in 2003, exactly one month after I started my first full-time job. The amount doesn't matter, it could be as little as $50/month, but start with something!