Published May 7th, 2015
Investing in dividend stocks is similar to planting a tree.
You start with something small – an actual seed, or a bit of hard-earned money.
Before you plant your seed or invest your money, you have to find the right place to put your tree seed or your money. Throwing a seed onto a rock will not do, nor will investing in a business on its last legs.
No, only rich, well nourished soil will do. Only the highest quality dividend growth stock gives the best odds of long-term dividend and capital growth.
When you do find the right company to invest in, or the right plot of land to sow your tree seed, the time comes to take action. You plant – you invest.
When you water the seed, eventually it sprouts. This is similar to when your high quality dividend stock shows its first signs of capital appreciation; new growth.
As you continue to care for the sapling, it grows. As you continue to monitor your dividend stock’s operating results, you see the business is growing. Both the tree and the company are thriving.
Over time, your sapling becomes a tree. It now is producing seeds of its own. Your dividend stock’s payments have grown over time. In both cases, the cycle begins anew.
The tree’s seeds beget more trees. The dividend stock’s dividend payments are reinvested into other high quality dividend growth stocks.
Imagine this process repeating over and over. In time, you will have an entire portfolio of dividend income generating stocks – all from the cash flows from your first investment. In time, the tree will produce a forest.*
*Note: Okay, basic biology says you need two trees to fertilize and create seeds, but the idea is the same – let’s pretend the tree is fertilized in the wind from a distant tree.
Don’t Cut Down Your Dividend Trees In Storms
When you invest in dividend stocks, think of them as trees that well create a forest if held for the long-term.
You wouldn’t chop down a tree because it lost a branch in a storm. Similarly, do not sell a dividend stock if it has a quarter or two of poor results. Business storms happen.
Loggers & Markets Are Crazy
Now pretend a logger came in and offered you $1,000 dollars for your tree one day. You say no, you don’t want to sell. A year later, the logger comes back and says he will give you $500 for the tree. Who in their right mind would sell at $500 because the value has gone down?
The logger is like the stock market. One day, it might value Helmerich & Payne at $117 a share; 6 months later, it could be $57 a share. Why would you sell when the market is offering you a lower price? What matters is the underlying business, not whatever price the market decides to throw your way on any given day.
Living On the Fruit of Your Forest for Freedom
Once your first tree produces other trees, eventually you will have a forest of trees – let’s say they are fruit bearing trees.
You can now happily live off the sustenance your fruit trees provide.
Dividend stocks are the same way. Over time, your dividend income will grow. You will be able to live on the dividend payments of your dividend stocks.
Whether it’s an orchard or a dividend growth stock portfolio, true freedom comes from having your needs met without being forced to do anything you don’t need to do.
Not everyone is born with an orchard or a dividend growth portfolio. Even those who are must learn how to be good stewards.
Becoming completely independent is a journey and a mindset. Having a portfolio of dividend stocks that generate passive income is a means to an end – the end is true freedom.
Freedom from the nine-to-five grind; freedom from relying on social security; the freedom to spend your time doing what you feel is best rather than what you have to do to survive.
You could even spend your time planting trees to build a forest for the next generation to enjoy – or perhaps a dividend portfolio for your children or grandchildren.
Most types of trees take decades to reach maturity. One generation can harvest the forethought of previous generations’ work by chopping them down and selling them. When this happens, they are no longer there to enjoy for the next generation.
Family wealth is typically lost in 3 generations. The first generation wealth creator learns sound money making habits. She/he may start a profitable business. The second generation of ownership likely does not have the same drive and ambition as the first. Having wealth without having to acquire it lead to poor wealth management. By the third generation, the wealth created by the first is typically exhausted, and the cycle begins again.
Getting out of the generational challenge requires gaining knowledge and thinking in long time frames – even outside your own life time. Education about how to invest in high quality dividend growth stocks is critical to escaping the ‘generational deforestation’ issue – both with trees and wealth.
Many of the greatest investors speak of the importance of having a long-term outlook.
“The single greatest edge an investor can have is a long-term orientation”
Seth Klarman does not mince his words when it comes to the importance of long-term thinking. Neither does Warren Buffett:
“Someone’s sitting in the shade today because someone planted a tree a long time ago”
Sources & Further Reading
- Dividends Are My Fruit on Dividend Mantra
- 7 Memorable Long-Term Investing Quotes on Sure Dividend
- 5 Examples of Dividend Snowballs Generating Real Wealth on Sure Dividend
- Source for money tree image