#12 - Finance Fridays - Dividends, Testing Business Ideas, Reselling Old Clothes

Disclaimer: This is not financial advice, I’m just brainstorming ideas related to money.

Contents:

• 🧐 Question of the Week - Should you buy Dividend Stocks in 2024?

• 💹Investment Review - Dividends

• 🎒Useful Resource - 7 Key Lessons on Starting a Business From Serial Entrepreneur Daniel Priestley

• 🥗Side Hustle of the Week - Reselling Old Clothes

🧐 Should you buy Dividend Stocks in 2024?

Dividend stocks don't have the same positive PR as high growth stocks and for good reason. Growth stocks have bigger potential for future capital gains which is what investing is all about. For example, old companies like IBM and Coca Cola are less interested in growth than upcoming superstars like Netflix.

But this is all hypothetical because if we look at the data we see that dating back to 1954, value (dividend) stocks beat growth stocks in 10 of the 12 periods of rising [interest] rates and 9 out of the 11 periods of falling rates - so 83 percent of the time. 

Dividends have accounted for 40% of stock market returns since 1930 and when you look at the companies, you understand why. Companies like Coca Cola, McDonald’s, Apple, AT&T, Pfizer have been around long enough to establish a sustainable business model. And once a company has reached this point, they can be relied upon to pay out to shareholders for the foreseeable future.

The Arguments FOR Dividends:

1. Dividends deliver income immediately rather than hoping the stock price alone will be substantially higher when you sell in 40 years time.

2. Dividends hedge against stock market volatility. In this video, Andrei showed how he got higher dividend payments Year-on-Year even though the stock market had one of its worst years. Dividends are never guaranteed but companies will always prioritise making sure their shareholders get paid.

The Arguments AGAINST Dividends:

1. Dividends are classed as income so you will be taxed on them unless you follow certain steps (I’ll explain below)

2.  Every penny paid in dividends is money not spent on reducing debt, growing the company and improving the value of the business. This is why some argue dividends have a direct impact on the stock value itself.

3. In a high interest environment, you can get better returns from high yield savings accounts without the risk of your investment going below your buying price. 

Given that most long term investment strategies are about compound interest over decades, I can see why dividend payments are a weak incentive to invest in a stock. For younger investors, maximum gains at the end of the investment period is more important than the tiny dividend payments you’ll get. But the idea that dividends stop the company from growing its share price is based on weak evidence.

2 Tips for Investing in Dividends Tax-free

Investors who invest heavily into dividends tend to be retired which means less total income tax. For those of us who do work, this is how we can invest in dividends without it being treated as part of our total taxable income.

1. Don’t be swayed by higher dividend yields. 

A high dividend yield, means the company is choosing to return more profits to investors instead of growing the company. Think about it. When interest rates are low, companies can borrow more debt more cheaply. The logic is if a growing company can borrow debt at 2% and invest the money to grow its business by 10%, then it should outperform a dividend company over the long term.

For example, looking at the FTSE100 you can see that BT offered 7.39% dividend yield but you would’ve lost 15.74% in capital gains at the same time. So if you invested £20,000 into BT, you would have earned £1478 in dividends but lost £3148 in value. You can choose to hold the stock long enough for the business to bounce back but looking historically at BTs stock price, it’s very unlikely you’re getting your money back. 

2. Use your Stocks and Shares ISA allowance.

It’s all tax free.

Dividends received by pension funds or received on shares within an ISA are tax free and won’t impact your dividend allowance. And once you have maxed out your yearly Stocks and Shares ISA investment amount, you’ll need to track your dividend income generated outside of your ISA. In the UK, all individuals are eligible for a £500 tax-free Dividend Allowance from 6th April 2024. And for those who are not working, this is in addition to your personal allowance.

In summary, this is where my head is at with dividends. 

• Dividends are still stocks at the end of the day. You should only invest in companies that will be more profitable in the long term whether they pay dividends or not.

• The dividend payments are so small that you would simply reinvest them until they are worth withdrawing and paying tax on them. Thus classing them as passive income is kind of silly to me. 

• The discussion online around growth stocks vs. dividends stocks are more hypothetical than evidence-based. Apple is a dividend stock that has continued to grow substantially whilst on target to Warren Buffet’s fund $878 million in dividend income in 2024. Facebook - another growth stock - is entering the dividend game too. And you can be pretty certain Greggs has plenty of room to grow. 

• It would take something pretty extreme for a company to skip dividends entirely like Greggs not paying in 2020 when lockdowns shut high streets.

• Dividends is a trojan horse to stock picking and newbies shouldn’t stock pick for pennies on the pound. Tying up large amounts of money for a passive income of dividend payments doesn’t seem to make sense to me right now but everyone’s circumstance is different.

I feel I've just scratched the surface with dividend stocks. And I'll need to dig deeper at a later date.

💹Investment Idea review (Dividend Stocks) 🚥

🔴 - Potential dealbreaker

🟡 - It depends

🟢 - Very Ideal

Yes I wrote a longer article on dividends above, but I still wanted to do an Investment Review.

1. Potential upside - 🔴 - The income is regular but very insignificant

2. Level of risk - 🟢 - Low. You’re very likely to be stock picking profitable companies with the confidence to offer dividends.

3. Upfront costs - 🟡 - Like any stock, you actually have to invest quite a bit to get a decent return. For example, if you wanted to make $100 per month from Apple’s dividends you’ll need to invest $235,294. But the money isn’t “lost”, just tied up.

4. Historic performance - 🟢 - Dividend companies have performed well in recent history

5. Specialist knowledge - 🟡 -People tend to invest in well known household names. So I wouldn't say it's a high skill ceiling to pick “good ones”.

6. Market saturation - 🔴 - Like most popular stocks, they are probably priced to the point of discomfort.

🎒7 Key Lessons on Starting a Business From Serial Entrepreneur Daniel Priestley

Inspired by - The Money Making Expert: The Exact Formula For Turning $100 into $100k Per Month! - Daniel Priestley

These were the key takeaways from this podcast episode by Steven Barlett.

1. Remember CAPSTONE when pitching your business idea

• Clarity – In simple terms, what do you do?

• Authority – Why should I listen?

• Problem – What’s wrong? What’s the unmet need?

• Solution – How do you fix it? How do you meet the unmet need?

• The Why – Why are you so passionate about this?

• Opportunity – How could we work together?

• Next steps – How do we start?

• Essence – Remind me of the experience I will get from this?

2. You are 5 asks from changing your life - Steven Barlett

Steven talked about how he was always willing to ask for things when others wouldn’t. So remember that sending that email to ask the question won’t cost you anything.

3. Use Waiting Lists to test your business idea

You don’t even need to invest any money into your business idea. Simply start a waiting list to see how interested people are.

4. Host more dinner parties.

If you’re looking for clients, leads or business partners. Host dinner parties. People love free food.

5. With or Without You Energy

When asking for help in business, don’t appear needy. Make it seem this is going to happen with or without their help. That way they feel they are missing out if they don’t help you out.

6. Have an origin story

If there’s something you keep coming back to then that is probably your business idea. And you will be passionate enough to stick to it. Passion or strong interest is important because business is hard and you need something to keep you going until you reach success.

7. Personal brand isn't “look at me”. Personal brand is “look at this”.

Building a personal brand isn’t about how people perceive you but how they perceive what you are working on. It’s more “this is my unique perspective on nutrition” and less “watch me get ready for work”.

🥗Side Hustle of the Week (Reselling Old Clothes)🚥

🔴 - Potential dealbreaker

🟡 - It depends

🟢 - Very Ideal

Inspired by - I made $14,000+ in ONE YEAR doing THIS side hustle, and you should too

1. Hours per week 🟡 - Depending on the margins on your items, it's little work for good pay but search for items can be time consuming.

2. Skill required 🟢 - Very easy, I believe anyone can resell clothes

3. Up front cost 🟢 - If it’s already in your wardrobe, it’s free inventory and you can control how much you want to spend at thrift/charity shops

4. Market saturation 🟡 - Fast fashion has reduced the relevancy of second hand clothes but focusing on luxury/unique items would be a smart play

5. Timeline to reach success 🟢 - You can get sales quick if you have the right clothes for the right season

6. Income potential 🔴 - Unless you're selling high end branded clothes, the margins are very low. Once you’ve sold all your spare clothes in your wardrobe, you’ll have to  enter a race to the bottom (in pricing) to beat competition.

Selling old clothes instead of throwing them away is straight profit. But there’s only so much clothes in one’s wardrobe. The natural next step is reselling from charity shops which is about sourcing what the market needs regularly. This can become time consuming at lower profit margins. If we add packaging and delivering, it's a lot of work and storage needed to sustain for a long time. 

The YouTube video above did a good job hyping it up but she’s a ex-consultant in New York with a nice apartment so you can assume she’s selling luxury items with a lot of room for price variability (in favour of the seller).

✍🏿Quote of the Week 

“You are 5 asks from changing your life”

― Steven Barlett

Send 5 emails to people you want to work with today and see what happens.