I left work at 49, my husband at 56. When I left I didn’t realize my non-employment would become permanent, but that’s a story for another time. We always dreamed of leaving work in our mid-50s and enjoying life. What we didn’t expect was for it to come surprisingly early - at least for me. I guess I have COVID to thank for that.
My children have a goal of retiring early too and want to work towards making that happen. It will be much harder for them.
Our generation lived through a time of low interest rates which made owning a home doable. I can only imagine what lies ahead for my kids in the future, but I do know it won’t come close to providing the opportunities we had.
So what can be done by someone so young to help them achieve their goal of retiring early? For starters, I believe dividend stocks will reign once again as a solid investment option and more investors over time will transfer out of the high achieving growth stocks, at least partially, and begin holding companies that provide a recurring income rather than having to sell shares for a lump sum capital gain.
Daniel Peris, a leading authority on the subject of dividends, believes the next opportunity in the stock market could be with dividend stocks. He’s recently written a book titled The Ownership Dividend and believes that dividend stocks could provide “profitable opportunities for those who are prepared”.
I recently read a review on his new book and here are some take-aways:
“Peris carefully explains how the past four decades of declining interest rates have led investors to focus on the price growth of shares, rather than the income they provide. His argument is well crafted, and he challenges the generally accepted notion that large, successful companies do not need to share their earnings with shareholders by paying dividends.”
Source: CFA Institute Book Review
Historically, dividends encouraged investment and because they were popular, the share price grew also. Over the past few decades that has not been the case. Instead, more investors have moved out of the stable dividend growers for the high flying growth players.
Unless an investor has harvested capital gains along the way, they are sitting on large unrealized capital gains today. But the pendulum is swinging, and these high-flyers are ridiculously overvalued. They may be earning lots of cash, but they are not sharing the wealth with the shareholders in the form of a dividend.
A return is not a return until the cash is in your hand. Dividends are cash in hand, whereas unrealized capital gains are feel-good numbers. Until those gains are actually harvested and money is in hand, can they really be called a “return”? If there are poor headlines or a stock market crash, those unrealized gains will be gone.
Peris has also discounted the Dividend Irrelevance Theory crafted by Modigliani and Miller in 1961. This theory states that dividends are irrelevant because they don’t add any value to a company’s stock price. Many on X (formerly known as Twitter) also use this as an argument to sway their readers away from dividends.
Peris claims this theory is outdated:
It was crafted at a time when companies “operated in capital-intensive industries and would need external capital to fund their growth plans and to pay dividends. This theory applies to only 10% of the stocks in today’s S&P500”.
Source: CFA Institute Book Review
“The fact that investing in dividend-paying stocks is out of fashion on Wall Street is well accepted; even Peris acknowledges that fact. But what if Wall Street is getting it wrong? What if Peris is right that dividends will soon become much more important?”
“Now that rates have risen, investors have more options and companies will no longer be able to borrow funds as cheaply as before, giving investors more leverage to demand that companies share their earnings via a dividend.”
I like Peris’ thinking. It’s similar to that of Tom Connolly who believes that dividend growth leads to share price growth.
Either way, my kids are already investing in dividend stocks to help them achieve their goal of retiring early.
I like to aim for income in hand, particularly one that grows, and that’s what I’m encouraging my kids to do too.