I did my first steps as an investor at the age of 17. It was just before the world financial crisis of 2008, and I was experimenting with investments in several financial tools. I started by investing in ETFs, and as I studied other financial instruments, I started analyzing and investing in junk bonds and individual stocks. At the age of 24, I started executing my current dividend growth strategy.
My passion for investments came from my dad, who is a financial advisor, who invests money for his clients. He taught me the basics and gave me the needed knowledge to start studying more and investing by my own. Thanks to him, I started investing early, and it gave me a huge head-start on my path to independence.
I believe in paying it forward, and I want to share my knowledge and experience to help young people enjoy their greatest asset - time. While time can be an enemy, because all things die, it can also be harnessed for our benefit. In order to do it, you need to start as early as you can. Harness the power of time and compounding interest to your benefit.
In this article, I will explain why dividend growth investing is great for young people and offer advice on how to start while you are young, and don't have a lot of money to spare. The keys are knowledge, reading, planning and studying.
Dividend growth investing for young folks?
The short answer is YES. The longer answer takes into account that young people, myself included, tend to be less expected, and from my experience tend to be more impulsive. Dividend growth investing offers a very steady path, that can be easily measured. From my personal experience, when I invested in growth, it was much harder to devise a strategy. Making bad investments looking for growth can be end with lost decades, as growth can be tricky.
Dividends on the other hand are more reliable. They seem to be growing slowly, and when you invest in a "boring" company like Procter & Gamble (PG), you seem to lose all the growth by companies like Netflix (NFLX). I always think about Aesop's Fable about The Tortoise and the Hare. Consistency is a key for long-term results, and that's how the tortoise beat the hare in a race. Sure, for short period of times, the hare can lead, but for the long term, consistency and reliability will give you the best results. Young people have the time, they just need to be consistent.
Another advantage of dividend growth investing is that it's easy to implement and easy to follow. You need to look for several candidates for your portfolio every month and invest the same amount of money on a monthly basis. Monitoring the portfolio is even easier since you have many positions, and they are blue chip companies that need minimal tracking. If you invest in risky stocks for growth, stocks that can lose their value in a day like some biomed stocks, monitoring can be time consuming.
Dividend growth investing allows young investors to use time in order to create income. This income is reinvested to create additional income. This income can also be used in case of emergency. While other portfolios will require selling assets even when u need several hundred of dollars, dividend growth portfolio can generate modest income quickly, and it can be helpful when a surprise expense pops up.
A story about Asher
I learned most of my lessons by trial and error. I was lucky to have my father to guide me through and back me up when I considered quitting, because I failed. By having him backing me up, and by constantly learning from my mistakes and achieving more knowledge, I managed to devise my own strategy and to be confident in my ability to reach my goals.
I try to teach and share my lessons, so others can make less mistakes than I did. One of my best students is my cousin Asher. He is a bright and inquisitive 14-year-old boy. I started talking with him about investing and finance several months ago, as he was very curious about the whole concept. In no time, he started asking me about dividends, and as you can expect, he was interested by the notion of money that turns into more money.
As a 14-year old, he obviously doesn't have a job, or the money to invest. I try to teach him some of the lessons that I learned. I try to promote his curiosity and stimulate his entrepreneurship. This will be a great tool for him once he starts working, and he will already have the knowledge to start saving and investing together with the desire to achieve independence.
Advice for young investors and parents teaching their youngsters to become investors
Read, read and then read some more. When you are a teenager, you don't have a lot of funds, but you usually have time. Allocate some of that time to reading. Even 15 minutes a day at 14 can accumulate into dozens of books by the time you are 18. It can give you all the basic knowledge needed to start investing. Education is a key for successful investing.
Learn basic budgeting. Understand what a budget is, and the concept of prioritizing. We all make choices in life, and these choices are building our future. When a teenager understands that everyone works under a budget, he will learn to prioritize his expenses. He will have to make choices according to the resources available.
Once you understand the meaning of budgeting, understand the basic concepts of income and expenses. It will help to learn how to save money and create a habit of saving on a monthly basis. At this point, you know your income, your expenses, and how much you can save. You are using a budget to allocate you limited resources wisely, and you are reading books that will help you to allocate your saved money in way that will help you achieving returns.
Now, when you have some basic knowledge, it is time to adopt an investor state of mind. Understand the businesses that you see around you. Whether it's the McDonald's (MCD) you had lunch at or the toothpaste you are using created by Colgate-Palmolive (CL). You are surrounded by businesses, and you want to own some of them. For example, my cousin told me after he ate at McDonald's that I should expect my $0.0000001 soon. He starts to understand the basics of the business world.
Now, it's time to realize the realize the power of compounding. The notion that every dollar we invest right now will grow over 10 times by the time we are 50 is hard to grasp. Therefore, even small amounts invested can be very valuable in the future. Time when harnessed can be an ally, and compounding interest is the weapon.
Now, it's time to set some goals. Simple goals can be short-term or long-term goals. People tend to think that young people have a very long investment horizon. That may be true, but they also need to save for short-term goals such as tuition, car, down-payment on a house and more. Therefore, it's important to learn to set goals to save for and invest accordingly.
Open an investment account and buy several shares every month. You can use brokers with no fees like Robin Hood. It's the habit that important. The notion of using some of your allowance, and you holiday gifts for your future. Even small amounts can accumulate to several thousands of dollars by the age of 18. The money saved is only a bonus, the knowledge and habits are the real asset here.
Dividend growth investing is extremely efficient for young investors. When you start young, you don't need to chase growth or yield. You just focus on the fundamentals and buy shares in quality businesses for fair valuation. The younger you start, the better results you will get. Whatever your long-term goals are, you should consider this strategy.
Young investors should take advantage of the free time they have on their hand and the time they still have on this planet. While they usually don't have a lot of funds to invest, they can study and learn by reading and experimenting. Technology has made education reachable, and cheap brokers are available for everyone. If you manage to reach the age of 18 or 21 with basic knowledge and your own strategy, you will have a meaningful head-start.
Disclosure: I am/we are long MCD, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.