Investment for Achieving FIRE - Dividend Stocks Edition | Let's Aim for Regular Cash Income Using Stock Investment!
When focusing on investments to achieve FIRE (Financial Independence, Retire Early), people tend to look only at investments aimed at building assets for retirement. However, in the process of investing for FIRE, it is also necessary to turn your attention to investments aimed at generating regular cash income.
Therefore, what I want to explain this time is "Dividend Stock Investing," which is an "investment aimed at regular cash income."
Even if you invest in stocks and are lucky enough to see the stock price go up, if you haven't locked in the profit—that is, if it remains an unrealized gain—you cannot even buy a single piece of bread at a convenience store.
If you are aiming for financial independence, regular cash flow is indispensable.
Moreover, even if you have not achieved complete financial independence, isn't it attractive to have regular cash income other than the salary you receive from your company?
For the working generation, who often have many expenses such as children's education, it can supplement living expenses or serve as capital for further investment.
For the senior generation, it can alleviate the pension shortfall after retirement, and it can be expected to create a little financial leeway even amidst the recent high inflation.
Against high prices and inflation after your income from work decreases or disappears following retirement from a salaried job, it is reassuring to hold assets that are said to be resistant to inflation, such as stocks and real estate.
In this article, I would like to touch upon what kind of investment method dividend stock investing is, as well as its advantages and disadvantages.
What is Dividend Stock Investing? Investing in Stocks with Relatively Stable Dividend Yields
Dividend stock investing is an investment method of purchasing and holding stocks with the purpose of receiving dividends regularly.
In this investment method, the targets are stocks of companies that have a stable financial foundation and have provided stable dividends over a long period.
The appeal is that you can obtain continuous dividend income by holding the target company's stock for the long term, and you can also expect capital gains (profit from a sale) when the stock price rises.
I will introduce the advantages below, including the points to consider when selecting a company to buy stock in.
Advantages of Dividend Stock Investing | 3 Benefits Generated by Holding Stocks Long-Term
The main advantages of dividend stock investing are the following three points:
• You can continuously earn dividend income.
• If the stock price rises, you can also expect capital gains (profit from a sale).
• By reinvesting dividends, you can utilize the power of compound interest to increase your assets.
Let me explain each advantage in detail.
1. You can continuously earn dividend income
By receiving dividends continuously, you can earn regular income.
For that purpose, choosing stocks of companies that provide stable dividends is an important point.
For example, in Japan, the following companies have declared progressive dividend increases:
• Mitsubishi Corporation: In its mid-term management strategy, it has set a policy to continue progressive dividends.
• Tokio Marine Holdings: In its mid-term management plan, it has shown its intention to continue progressive dividends.
2. If the stock price rises, you can also expect capital gains
The stock market fluctuates in the short term, but it often shows an upward trend in the long term. Therefore, there is a possibility of enjoying the benefits of price growth.
In that sense, "companies that currently have good performance and are expected to increase revenue and profits in the future" have the potential for their stock prices to rise.
3. By reinvesting dividends, you can utilize the power of compound interest to increase your assets
Dividend income (income gain) is generally often less profitable in the short term compared to profit from the sale of assets (capital gain).
However, by continuing to reinvest the dividends obtained through investment over the long term, you can slowly but surely achieve financial independence.
Even if the income is small at first, by steadily continuing over the long term and repeating reinvestment, you can obtain regular income even after FIRE or retirement. Therefore, if you are interested, it is better to start early, even with a small investment amount.
(I have summarized income gains and capital gains in the following article, so please refer to it.)
What you need to know about income gains and capital gains to achieve FIRE – Julius Co., Ltd.
Disadvantages of Dividend Stock Investing | Understand the Risks and Analyze the Companies
Reading only the advantages might make dividend stock investing seem like a sweet deal, but I want you to understand the disadvantages before you start.
I think the following two points are the disadvantages of dividend stock investing:
• High-yield dividends are not necessarily guaranteed.
• It involves the risk of stock price fluctuations.
Let me explain each disadvantage and how to hedge the risks.
1. High-yield dividends are not necessarily guaranteed
Even with high-dividend stocks, there is always the risk of dividend reduction or suspension. Please understand that it is impossible to avoid the possibility that the company might change its policy to a dividend cut after your investment, or that the stock price might fall due to a deterioration in financial conditions.
Therefore, it is important to analyze the company's financial situation and future potential before investing.
As I mentioned in the advantages, it is necessary to check the company's dividend policy in advance before deciding whether to invest or not.
2. It involves the risk of stock price fluctuations
Even if you are investing aiming to acquire dividends (income gains), you cannot be unrelated to stock price fluctuations.
This is because the market moves regardless of our intentions. Even if you say you don't need capital gains, it's useless.
You need to carefully determine the timing of purchasing stocks, such as when the entire stock market is falling.
Summary
To achieve FIRE and aim for financial independence, mastering income gain investment, where regular cash flow can be expected, is essential.
In this article, I introduced dividend stock investing as one of those methods.
I keep in mind to "stay rich for a long time" rather than "get rich quickly."
Because once you become rich, you can stay rich forever.
The turning point is when you become able to cover your living expenses with unearned income.
Until then, I also valued income sources other than investment, such as my salary. In other words, I believe I worked hard as a company employee.
If you try to make a big profit in a short period through investment, the risk inevitably becomes high.
It is crucial to take time to grow the assets that generate income gains.
It can be said that "Income Gain (Unearned Income) + Compound Interest" is the royal road to financial independence. (Text by Julius)
About the Author Kenji Kamioka
CEO, Julius Inc. / FIRE Practitioner
Kenji Kamioka is a former IT executive who spent 30 years in the corporate world, with over 10 years working across Asia. His life changed when he read Rich Dad Poor Dad.
Realizing the trap of the "rat race," he started building assets in real estate and stocks while still working. It took him 10 years, but he successfully achieved Financial Freedom and graduated from the salaryman life.
He established his own asset management company to optimize tax efficiency and now dedicates his time to teaching others how to escape the corporate cage.
His advice is not theoretical but based on the gritty reality of achieving FIRE.Credentials: AFP (Affiliated Financial Planner), Certified Real Estate Transaction Agent.
Book
❶『令和のサラリーマンの為のFIREのススメ』(Amazon電子書籍）
❷『FIRE Recommendation for Office Employee』(Amazon Kindle）
