I would like to talk about the importance of investment income, e.g. dividends on shares. In these tough economic times, many stock market investors are starting to realize how important dividends are. When I talk about dividends, I am referring to shares or stocks, but I also value income from other types of investments, e.g. interest from term deposits or bank savings accounts and rental income from real estate.
A bird in hand
Why focus on income? Why not focus on capital gains when investing in shares? Income you receive when you buy shares is a tangible sum of money that you receive from the company, a signal from the company that they are financially secure. Capital gains, on the other hand, is normally out of the hands of company management and is the result of complex external forces. A company can be poorly managed yet still have massive increases in capital gains.
If you invest in shares and get double-digit capital gains every year, just before you retire you will be sitting on a comfortable nest egg, but then the stock market crashes and you lose everything. If you invested in shares that had negligible capital gains but paid out double-digit dividend yields (e.g. some utility and telecommunications stocks pay high dividends) then even if share prices go down, you still would have received regular income for fifty years that went towards improving your standing of living. Income is safer. When a company pays you regular income, it is a signal from them that they are profitable
There is also another reason why I believe income investing is important, and that reason is because income investing gives you freedom.
When we look around, we see people working hard to earn income. We see the Aussie battler working 60 hours a week as a garbageman to pay off the mortgage and feed the kids. We see the laborer toiling away in China assembling mobile phones for $100 per month. There are a small number of people who love their jobs, but surveys show that for the vast majority of us, work is painful. Why do we put ourselves through this torture? Why don't we say no? The answer is that most of us are wage slaves. We work because we have to pay off debt. If it is not credit card debt, car payment, or mortgage debt, it is to feed the kids or to feed yourself. When I talk about debt in this blog, I talk about more than credit cards and mortgages. I use the broad definition of debt, which is the "future obligation to pay." That is, having children puts you into debt. If you are born and you need to eat, you are in debt. Because we all need to eat and because we all need shelter, we are all from the moment we are born denied freedom and we become wage slaves.
"The rich rule over the poor, and the borrower is slave to the lender." Proverbs 22:7
Debt is the currency of slaves. If you earn $100 per week and you owe $100 a week, you will always be a slave. But if you earn $100 per week and you owe $99 per week, there is hope for escape. You can invest $1 per week in shares that pay high dividends. You keep working and keep investing and over time your shares will generate $99 per week, which means your shares can pay off your debt, and you are a free man.
With regards to my own life, I am at the stage now where I am still working and investing, hoping to one day generate enough income from my investments so that I can cover the costs of living. This attitude towards life is not easy. The cost of living can change, and income from investments is not always predictable, but nevertheless it is better to attempt to escape from slavery than the be picky about the minor problems associated with living as a free man.