Updated: Jul 28
I'm starting a series on dividend stocks, they are one of my favorite passive income streams. Today I'll cover high level how I view the stock types, diversification, and taking into account market cycles. There are all factors I consider before I even look at a single stock to add to my portfolio.
First, a little background and shameless plug: Did you know the average millionaire has seven streams of income? Dividends stocks helped me leave my corporate job and they still provide a stream of income that funds my current lifestyle. If you want to learn more hop over to playbooktofreedom.com where I uncover my journey and give you my playbook to early retirement. You will find mindset hacks, conceptual approaches I used to find freedom, with practical steps I picked up from years of coaching and self development.
OK enough of that, let's get down to business. There's a lot to cover and I want to start really high level because having as much knowledge as possible means you're better equipped to make informed decisions when things don't go as planned (and they won't always go according to your plan).
Remember, I'm just a guy who managed to retire early using these strategies. So I'm not a financial advisor, I'm not a trained professional. I do use the stock market as my main source of income and have been doing this for a long time. I believe these tactics can work for you as they did for me, but this article is for educational purposes it is not trading advice. It may make your money or it may not!
Just like any strategy you aren’t going to always ‘win’ trading dividend stocks, but since shares never expire you can broaden your time horizon and I want you to realize you can take my system and put your own style on it!
‘Growth’ vs ‘Income’ vs ‘Value’ Stocks
Wallstreet and financial advisors are fond of labeling stocks into types. It doesn’t matter if we agree or not, it’s good to understand their labels so we can make an informed decision. Generally they label a stock as a growth or income stock. Some people consider themselves value investors as well. I’ll break it down how I understand it.
Income stocks are typically companies that pay out a significant portion of their earnings as dividends to shareholders. These companies are usually the more ‘boring’ stocks in more stable and mature industries. They’ve been around a while, and they don’t normally get too much discussion in trading groups because you likely won’t be doubling your account trading them. The key attraction for investors is the regular income they generate through dividends. Utilities, real estate investment trusts (REITs), and certain consumer goods companies are often seen as income stocks.
Growth stocks represent companies that are experiencing higher-than-average growth. Traders/investors buy these stocks with the expectation that they will profit from the capital appreciation of the shares. These companies tend to reinvest all or most of their earnings back into the business to fuel more growth, hence they usually don't pay substantial dividends. Tech and biotech industries have a good number of growth stocks. These are generally newer companies, more inventive trying to do big things, these are the ones you hear about in trading groups who want to sell the dream of becoming a day trader and never ‘working’ again.
Value stocks are companies that investors believe are currently undervalued by the market. These stocks have lower price-to-earnings (P/E) ratios than similar companies in their industry and may also pay dividends. The companies may be facing temporary issues or be in an industry that's currently out of favor, but value investors believe in their long-term potential. They invest in these stocks with the expectation that the market will eventually recognize the company's full potential and the stock price will rise. This is a buy low and pray they recover strategy in my mind.
Now that we’ve discussed income vs growth stocks, lets briefly talk about sectors because I believe diversification is super important to everyone’s portfolio. I like to have diversification inside almost all of my individual strategies as well.
There are 11 ‘sectors’ in the stock market:
I think you can imagine which stocks fall into which sector at GKT we encourage you to consider owning names in different sectors. Diversification is a great risk management tool.
I know it seems obvious, but do you know how many traders really only focus on Technology stocks? They are sexy, and when the market booms, you can make great money, but when the market declines as we’ve seen the last year, these traders can take a beating sometimes giving up all their profits (maybe more) because they are only focused on this single sector.
To recap, we’ve discussed growth vs income stocks, we’ve talked about multiple sectors, lets talk about market cycles next. I know you are probably thinking I thought this was about dividend stocks… Hang in there this is important.
The economy moves in waves, with periods of growth (expansion) and decline (recession). This is normal, its expected, so don’t panic when you hear the talking head try to pump you with fear. This roller coaster ride affects industries in different ways, which influences the performance of different sectors in the stock market. Understanding these stages are normal and what to generally expect can help us optimize our portfolios by leaning into sectors likely to perform well at each stage. But remember, we're not shifting our entire portfolio based on the economic cycle – we are making small modifications to our holdings and looking for opportunities to buy low and sell high!
This was a lot to cover today, next time I’m going to jump into Dividend Aristocrats, talk about some of my favorite names, and several specific strategies I use to build my dividend portfolio. No matter you level of expertise I hope this is helpful to you, as I say almost every article I keep it ‘simple’ if you are new to the market you might be thinking this is complex but its not with a little time. You really can make money in the stock market and it doesn't have to be complicated.
Until then, keep thinking about growth stocks versus income stocks. Try to understand the economic cycles and how they influence different sectors. How can you build a portfolio of some dividend stocks that will pay you with just a few clicks of some buttons on your screen. A balanced and diversified portfolio is on of the key pillars for The Good Kids! Click here for part two! As always happy trading Good Kids!
I'm not a financial advisor, I'm not a trained professional. This article is for educational purposes, it is not trading advice.