Investor

Are you a speculator or an investor? Let’s find out

SrdjanPav

Co-produced with Treading Softly

I was just commenting to my wife about how quickly the year seems to go by. We may not all be stuck inside anymore, so my days are filled with more requests and activities. than when we were all locked up. For that, I have nothing to complain about.

However, it seems like only yesterday we entered 2022 with bright eyes and ready for another adventure! I entered 2022 with a number of goals and plans. One of the goals was to see my dividends arriving in my account in 2022 exceed the amount received in 2021. I passed this milestone in August, taking only 8 months to reach what took 12 months last year. Currently, any dividends that come into my account all increase the growth I will see year over year. Exciting times to say the least!

As we enter the final months of 2022, we should take a moment to review how we have approached the markets this year and assess what we want to achieve in these last three months.

First, we need to know the desired method.

Speculate or invest?

Buffett said there were two ways to approach the market.

One is that of a speculator, who buys stocks and aims to sell them to someone else at a higher price. This is done regardless of the value of the business or its contribution to the economy. This method only transfers wealth from one individual to another.

The other is that of an investor, who buys shares and aims to profit from the output of the company. This method generates wealth over the long term.

He was responding to a question regarding how Berkshire (BRK.A)(BRK.B) views the market and how it interacts with it. Buffett through Berkshire took several other companies private and ran them very efficiently, if not passively, while enjoying the profits they produced. GEICO and Clayton Homes are among its vast holdings.

Buffett isn’t looking to sell those holdings any time soon. He did not buy them to return them, but to hold them and reap the rewards.

I don’t know about you, but I can’t buy a publicly traded company with my brokerage account balance. So trying to mirror Buffett is out of the question. I can, however, learn from this dual perspective on the market and recognize a few facts:

  1. As an income-oriented investor, I primarily buy securities to reap the rewards of owning them – cash dividends.
  2. As an income investor, I’m not looking to flip stocks to take advantage of the next buyer.
  3. As an income investor, the production of my holdings is exceptionally important to me because this production pays me dividends.

I’ve heard many times that receiving a dividend and selling stocks for cash are identical in their outcome – you have cash. I would agree if that was all there was to consider. However, it ignores many other factors.

  • The sale of shares reduces my stake in the company.
  • Selling stocks takes that money out of my asset base, unlike adding a dividend to it.
  • Selling stocks requires active work and timing to ensure a “profitable” return which in reality is simply transferring money from one investor to another instead of being paid on the production of a business profitable.
  • Selling stocks to pay for retirement is not investing. This is the second stage of market speculation – at least as Buffett describes it.

So, as an income investor, I don’t see selling stocks to get money to pay for retirement as the same thing.

So once you’ve decided how you want to approach the market for the rest of the year, we need to take a closer look at our current goals.

Update or adjust your goal

As I said, one of my goals for 2022 was to see dividend growth in my portfolio – in my case, I saw dividend growth through organic growth via dividend increases and a growth through reinvestment. I achieved this goal because all dividends received from mid-August to the end of the year will be greater than what I received in 2021.

What were your goals for 2022? I’ll be honest, the most common goal I see is to “make money” or “get rich” which are often nebulous and hard to gauge.

Personally, I like tangible and measurable goals. For example, if you want to see dividend growth in 2022 compared to 2021, by how much? Does even $1 of growth make you happy or are you looking for a fixed percentage of growth like 5% as your goal?

It may not be the final number that matters, but the amount you reinvest that interests you.

We recommend that income investors who are retired reinvest at least 25% of all their dividends received to maintain growth in their income stream.

So if you’re below that, your goal may be to hit 15% or 20% this year. You can concretely see how you’ve been doing since the beginning of the year and adjust your goal upwards if you’ve exceeded it, or adjust budgets to meet your goal if you’re below it.

Taking a moment to stop and assess your mid-year goals can be an essential self-check. It also helps put your short-term goals into perspective for the bigger picture.

You can live long, or not

One of the main drivers of investing for dividend growth is that your income will grow organically over time – you don’t have to do anything. While this is true, a low growing yield can often take decades to reach a stable high yield.

Using two very conservative examples, we’ll take Coca-Cola (KO) which earns 2.9% and has a 5-year CAGR of 3.57% on its dividend, and compare it to the unchanged dividend of RLJ Lodging Trust, $1.95 Series A Cumulative Convertible Preferred Shares (RLJ.PA) which is currently yielding 7.7% at the time of writing.

Dividend income

Author’s calculations

If you took all of your dividends in cash, with no reinvestment, it would take KO nearly 30 years to catch up to RLJ-A’s income.

This is a long-term horizon since the average life is about 73.2 years old! You would need to buy KO young and keep holding it!

I strongly encourage retirees to think with a long-term mindset, but low returns with organic growth like KO can often necessitate or require too long a horizon to be beneficial for retirees building an income portfolio in the present.

So while I want you to plan for the future, even in retirement, I don’t want you to give up a solid income now in the hope of receiving more in the future.

The time of dreams

The time of dreams

Conclusion

How is the rest of the year going? Did you reach your goal and do you need to readjust it to keep fighting? Do you have any adjustments to make to help you achieve your goal? Perhaps it needs to be more precise, more measurable and less nebulous.

In this process, you need to know how you approach the market and understand that not all “long-term” thinking is beneficial, especially if its fallout is too far into the future.

In retirement, you will need money to pay for certain things. If you have to sell stocks to do that, that’s an option. I recommend and invest using an alternative method, I buy from big companies who pay me for my property. My wallet is like my own little Berkshire. While I can’t afford to privatize all the big companies I love — I haven’t achieved Buffett status yet — I still love reaping the rewards of my ownership.

You can benefit from an investor’s mindset and avoid a speculator’s perspective.

Let’s get paid by putting our capital to work, it’s a wonderful way to enjoy every day, and it’s an income investment!