Dividends are an extremely important concept for financial security. They’re what make compound interest possible, and some consider compound interest to be the 8th wonder of the world. Without it, you severely limit your ability to save money throughout your lifetime. Considering that traditional savings accounts typically have interest rates of about .01%, effectively nothing, and normal inflation sits at about 2-3% year over year, you’re actually losing money each year just by keeping it in a savings account.
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Of course there are financial vehicles you’ve utilized your whole life, like your 401(k), a separate personal IRA, an HSA, or 529, etc. But each of these financial vehicles are limited in some way. 401(k)’s are tied to your employer, so hopefully your employer offered a good one with good matching! HSA’s can only be used for healthcare, and 529’s for college funds for your children and grandchildren. And all of them have contribution caps! To make the most of your money you have to find alternate methods.
Warren Buffett once said, “If you can’t figure out how to make money while you sleep, you’ll work until you die”. He was referring to earning dividends, or passive income. It’s uncapped, limitless potential. You can earn dividends through owning certain stocks or Mutual Funds, which either pay you a dividend at the end of each year based on earnings or you can choose to reinvest the dividends back into your original investment. The latter, growing your investment exponentially, is compound interest.
You can also earn dividends from “whole life insurance”, and reinvest those into the policy to grow it’s value and therefore the dividend it receives each year, just like your stocks. Not all insurance pays financial dividends, such as Medicare supplement plans for health insurance, although you could say they pay dividends for your health.
Real Estate Investment Trusts (REIT’s) are another way to earn dividends. This is a great way to invest in real estate for a fraction of the cost of buying property. In a REIT, you contribute to a fund of a number of properties along with a number of other investors. The fund is made up of properties of varying risk levels that make up a certain level of aggressiveness that the fund aims to have on its return. By spreading the risk across a number of different properties and investors, any one property failure will likely have very minimal effect on any of the investors. A dividend is paid out regularly to the fund investors, which can either be pocketed or reinvested into their stake in the fund. Once again achieving compound interest.