A familiar metaphor in the world of financial investing is “the snowball effect”. Imagine standing on the top of a mountain in the middle of winter when a fresh amount of snow has fallen out of the sky. What happens when you shape a snowball and throw it down. More and more snow will stick to the snowball, creating an unstoppable object. The same analogy can be translated to investing.
I mentioned before that one of my investing strategies is dividend investing. I try to invest in solid companies who provide a decent dividend payout, either quarterly, semi annually or annually. I consider these dividend payouts as extra cashflow and reinvest them in the same company or another one. When you start investing using this strategy, your initial return is going to be modest. However, when you consecutively feed your broker account with fresh cash and reinvest those precious dividends, you create an additional stream to further increase your passive income. It won’t take long before you see multiple dividend payouts come your way, feeding your account, providing you with more soldiers to help you on your quest. This snowball effect or compounding interest effect is something you have to be patient for, but once it starts, it will increase your return exponentially. Patience and persistence is key!
Below a graph of my dividend payouts per month. You can see that some months are better then others. I am still in the beginning phase but am very persistent to see my snowball getting bigger and providing a decent source of passive income.
It’s important to notice that some companies offer a cash payout, give you the possibility to automatically reinvest dividends or provide you with the option to decide yourself. The same counts when you invest in Exchange Traded Funds.
You might wonder what the best option is? You have to consider that there are multiple differences between countries/institutions and their rules when taking the payout option into consideration. For instance, when choosing the automated reinvestment of dividends in the USA, there are certain brokers that don’t charge additional costs. Therefore, by cutting down on additional broker fees, you can achieve a higher return. These situations can be very specific and vary between brokers so in case of doubt, I suggest to do some research.
Besides that, you also have to consider what the best option would be once you stop working? Would you like to see cash payouts hitting your account every month or would you like to see an increase in the amount of shares every month and thus, selling a certain amount to provide you with cash, a so-called homemade dividend. I always choose the cash payout option so there will be less hassle once I’ll use my dividend payout to supply my lifestyle. It also provides me with a choice. I can stick with the same company or invest in other companies or ETFs, which look more attractive at that particular time. When you choose the automated reinvest option, you will have to setup a withdrawing system in which you sell a set amounts of shares in order to create cash for living.
As I am trying to setup multiple streams of passive income, ideally, I would like to receive a 3-4 % payout in dividends. Therefore, I only invest in ETFs that use that payout option instead of the reinvest option. This is a personal choice and fits us the best.