I can already tell I’m going to get some flack for that headline, but… I forgot today was Good Friday. Now, before I dig this hole any deeper, let me first say happy Good Friday! And now let me clarify: a large part of my daily life revolves around routine. I think my tendency to do the same things over and over in the exact same way is one of the reasons why I have consistently been able to make profitable stock trades. The stock market is a big part of my daily routine. Every morning I wake up, brush my teeth, make my protein shake, turn on CNBC, and sit down with my laptop to check to see what’s going on with the stocks in my portfolio and my watch list. If you read my article from the other day about the gaming industry, you already know that Melco Crown Entertainment (MPEL) is my largest holding. That stock has been pretty volatile over the past few weeks, and yesterday happened to be a pretty good day for the stock, as it finished the day up over 4%.
So you can imagine how excited half-asleep me was this morning when I saw +4% for MPEL for the second straight day! And of course you can imagine the disappointment when the grogginess quickly wore off and I realized that quote was from yesterday. Because the market is closed today. Right.
I have a spreadsheet file log of all my trades that I update at the end of each week. Maintaining this file helps me keep everything organized, and it allows me to easily assess my performance. Since the market is closed today, I went ahead and updated my spreadsheet file for the week, and I was pleased to see that I had received dividends from Capstead Mortgage yesterday. So even on a day where the market is closed, I earned a couple hundred bucks from dividends!
Dividends are a very under-appreciated aspect of the stock market, especially for new traders. I think the reason why dividends tend to be so under-appreciated is because they are boring. When certain stocks can move 3-5% in a single trading day, why should anybody be excited about a 3-5% annual dividend? The biggest reason that should be exciting is simply this: dividends are guaranteed. Sure, you can gain 3% in a single trading day with a volatile stock. But you can also easily lose 3% on that same stock the very next day. In my 5+ years of trading, I have yet to come across a company with a negative dividend.
Dividends can provide exceptional long-term returns for shareholders. In my book, Beating Wall Street with Common Sense, I have an entire chapter devoted to value investing, and I discuss the under-appreciated power of dividends:
…Dividends can be viewed in a similar way as interest paid by a bank into a savings account. When you deposit money into a bank savings account, the bank pays you a small percentage of interest on your balance. There are many similarities between interest payments and dividend payments. The biggest similarity is that, when reinvested, dividend payments compound over time like interest does. Let’s say you have $10,000 in a bank account that pays 5% annual interest. That means that every year you get $500 from the bank. If you withdraw that $500 and put it in a mason jar and bury it in your back yard every year, at the end of 10 years you will have a total of $15,000 dollars ($10,000 in the bank account and $5000 buried in the back yard). However, if you allow the interest to remain in your account each year when it is added, the account grows throughout the 10 years and your 5% interest amount grows along with it. It may not seem like a big difference, but at the end of 10 years the compounding interest would have grown your bank account to $16,289. Simply by allowing your interest to compound, you would have earned an extra $1,289 dollars. In percentage terms, that is over 25% more in interest!
So how do you get dividends to “compound”? …
For more about how to maximize the power of dividends, read my book. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market in five years using only basic principles of psychology and common sense. To read about how I did it, check out my book, Beating Wall Street with Common Sense, and stay tuned to www.tradingcommonsense.com!