How to make money on dividends - 5 strategies for buying dividend stocks

Determining the monthly amount for living

Each of us has different needs regarding the amount of money required for living expenses per calendar month. First, you need to independently estimate what your expenses are per year and it is advisable to leave a little more for unforeseen expenses.

Suppose we need 50 thousand rubles per month, which we want to receive *passively from dividends. This amount is equivalent to 600 thousand rubles per year.

The note “Passive” means that no action is required from us to receive this money.

Since most Russian companies pay dividends in the summer, you need to independently plan your budget for the whole year. For example, payments during the year could be something like this:

• in spring - 50,000;
• in summer - 400,000;
• in autumn - 150,000;

It is worth spending the money you receive wisely so that your monthly expenses are approximately equal. After all, there is winter and spring, when there are no payments or they are minimal.

If we keep money on debit cards with interest on the balance, we will be able to earn an amount of about 3-5% as a bonus (depending on the current rate on cards). For example, Tinkoff and Benefit cards (from Home Credit) charge a good interest rate and also pay cashback on all purchases. For example, now on the Tinkoff card the interest rate on the balance is 3.5%.

How much money is needed to buy a sufficient number of shares - calculation example

Let's calculate how many shares you need to buy in order to live on dividends, receiving the coveted amount of 600 thousand rubles per year.

To do this, multiply the monthly amount by 12, and then divide it by the average dividend income. For example, for 2021 the average return on the Moscow Exchange index is 6.5%. Taking into account taxes, the amount received is reduced to 5.59%. The formula for calculation is as follows:

[50000 × 12] / 0,0559 = 10 733 452

In total, you need to have an amount of 10.733 million rubles invested in shares for a monthly dividend income of 50 thousand rubles.

The amount is quite large, but we looked at the average return of a stock index, which includes many companies that may pay little or no dividends.

If you select only dividend stocks that pay significantly more, you can greatly increase your income.

For example, Tatneft has been paying very high interest rates of about 11-13% per annum for more than 5 years, MTS has been paying 7-10% per annum. Second- and third-tier stocks and over-the-counter stocks can provide even higher returns, but they are not as stable as blue-chip companies. When buying small companies with large dividends, you should take into account the high risks.

In 2021, Tatneft paid a modest 2% dividend. This example shows that you should not invest all your money in one company.

All experienced investors build an investment portfolio of stocks in different sectors to reduce the risks of individual issuers. This process is called risk diversification. You can read more about risk reduction and securities portfolios in the following articles:

• Portfolio diversification rules;
• Profitability and risks of the investment portfolio;
• How to create an investment portfolio;
• The principle of building a securities portfolio for beginners - a guide;

How to buy shares for the common man

To live on dividends you will first need to become a participant on the stock exchange. Any individual can become a participant in stock exchange trading. To do this, you need to register with one of the stock brokers. I recommend the following companies (I have been using their services for more than 7 years):

• Finam (promotion: Free Trade tariff, trading without commission forever)
• BCS Broker

These are leaders in the field of brokerage services. Free deposits and withdrawals, lowest commissions. Through them you can buy all securities listed on the Moscow Exchange, receive dividends, etc.

After registration, you can open a brokerage account. Further, it will be possible to replenish it. You can arrange an interbank transfer so as not to go to the broker's office. Any deposit amount. There are no restrictions on limits.

The broker will provide access to trading terminals where purchases will be made. Trading terminals are available for both computers (Quik) and mobile phones (applications). If you can’t buy it yourself, you can call a broker and he will accept your application over the phone.

Detailed step-by-step instructions with screenshots for buying shares can be found in the articles:

• How to buy shares for an individual - step-by-step instructions;
• How to make money on stocks;
• How to start trading in the stock market as a beginner;

I also recommend reading useful articles on investment:

• How to make money on the stock exchange;
• Stocks and Bonds for Beginners;
• Return on shares - what makes up its size;
• How to select undervalued stocks based on multiples;
• Is it possible to make a lot of money from investments;
• What determines the price of shares;

Either a man or a ship

If the director of the company and its founder are the same person, then the question immediately arises: does it mean that he needs to enter into an employment contract with himself? As they say, it’s always a pleasure to work with an intelligent and honest person, but isn’t such a “split” a legal blunder?

“No, it is not,” the law tells us. – A legal entity and an individual are not the same thing, even if we are talking about one person. Acting on behalf of a company, an individual becomes depersonalized, becoming like a company, no matter how strange it may sound.”

“Man and Steamboat” is the name given to someone who has achieved great success in their business. From a legal point of view, you cannot be both a “person” and a “ship” at the same time. Here someone is closer. We'll have to choose. In any case, in court, the actions of a legal entity are recognized exclusively as the actions of a company. So, does it still become necessary to enter into an agreement with oneself?

“No,” the legislation answers us, “it does not arise. A contract is always a bilateral agreement, and if there is only one party, then how can this be implemented in practice, even if you really want to?”

Well yes, indeed. What are we? Fine. Then, if there is no contract, the obligation to pay wages (to oneself) disappears, and labor legislation is not violated in this case?

“Yes,” the legislation agrees, “I am not violating in this case. And instead of a salary, the founding director can receive net profit - dividends.”

How long will it take to accumulate the required amount?

How long will it take to accumulate an amount of 10.7 million rubles in order to start living on dividends? At first glance, this seems impossible. However, it is not. Thanks to the effect of compound interest, the time required will be significantly less.

To speed up the accumulation process, it is worth reinvesting all income that comes from investments (bond coupons and dividends).

Let's take a closer look at the effectiveness of compound interest and give specific numbers.

1 With a monthly investment of 40 thousand rubles at 8% per annum (for such a return you can simply buy reliable corporate bonds), in 152 months you can accumulate an amount of 10.583 million:

152 months is 12.5 years. Quite a long time. Let's consider some more options.

2 If you increase the deferred monthly amount to 80 thousand rubles at the same 8% per annum, then after 96 months there will be 10.861 million rubles in the brokerage account:

96 months is 8 years and we will already be able to live on dividends. It’s already a more foreseeable time, but saving 80 thousand rubles is an impossible task for most ordinary citizens.

3 If you invest only in the stock market, you can reach your goal even faster. A monthly investment of 40 thousand rubles at 15% per annum (this is the average return on the Russian stock market) is presented below:

We see that the accumulation period has noticeably decreased to 10 years due to higher profits than with the first option, where we invested in bonds.

How to take inflation into account when calculating future dividends

In these calculations, we did not take into account inflation, which will eat up purchasing power from year to year. Today's 50 thousand rubles are no longer what they will be in 10 years. This is especially true if we are talking about savings in bonds and deposits, which are more stable in terms of profit, but have low returns.

Stocks bring almost 2 times higher profits over a long period of time, so it is most logical to accumulate stocks instead of money. And in calculations, focus on their total number in possession. Let's look at an example of how an investor should reason.

For example, we analyzed the current situation, looked at the history of dividend payments and selected the 4 best companies, from which we want to create an investment portfolio worth 11 million rubles. Let us make approximately the following distribution:

• Tatneft preferred shares 2 million rubles (3000 pcs);
• Gazprom 3 million rubles (12,000 pcs);
• Sberbank preferred shares 3 million rubles (14,500 pcs);
• MTS 3 million rubles (10,000 pcs);

These shares currently (2019-2020) pay dividends above the average for the Moscow Exchange index and are taken as an example only. The approximate number of shares at average current prices that we can buy with the allocated amounts is indicated in parentheses. That is, our task is to accumulate exactly this amount of securities. In the future, our dividend payments will be discounted taking into account business growth, increased income, etc.

Our portfolio: out of 3,000 Tatneft preferred shares, 12,000 Gazprom preferred shares, 14,500 Sberbank preferred shares and 10,000 MTS should bring a comparable amount both after 5 years and after 10 years (and maybe even more). Most likely, in 3 years this number of shares will no longer cost 11 million rubles, but more. Therefore, in total, more money will be required to purchase shares. But, on the other hand, the level of wages should also increase.

Note We looked at an example of a portfolio of 4 companies. This is extremely little to call your investments “diversified.” There are risks that in the future some companies will stop paying such large dividends as they do now. To reduce risks, it is better to identify a larger number of companies for investment. The optimal number is 10-20 companies.

• How to live on interest from a deposit;
• How to calculate interest on a deposit;
• Online investment calculator;

Adviсe

A small selection of tips and recommendations for reducing risks and increasing profitability.

Don't bet everything on zero

How do newbies usually act? They choose one company, or two or three, that pay the most generous dividends. And they invest all the money. There is logic in this. Invest in those assets that bring the maximum return.

And they completely forget about the risks. What happens if the company experiences financial difficulties in the future? What does this mean?

1. The company may simply stop paying dividends. Or reduce the size significantly.
2. Quotes will fall, if not to the floor, then by tens of percent.

As a result: you almost completely lose dividend income. And you can only get rid of papers at a loss. And even if this is a temporary phenomenon and in a few years everything will return to normal levels, this downtime will cost you dearly.

This is such a trap.

Example. For 2015-2016, the Surgutneftegaz company paid generous dividends to its shareholders. About 18-22% per share. Then the size decreased catastrophically, to a modest 2-3%. In addition, the company's stock quotes collapsed from 45 to 30 rubles.

It is noteworthy that many other companies paid record dividends in 2021.

The problem is solved by expanding the portfolio to include shares of several companies. Albeit with a lower dividend yield. Problems that arise in one company will not in any way affect the receipt of dividends from others.

I see the future

No one will ever tell you with 100% certainty what will happen to the market or specific company shares in 5-10 years. Even after 2-3 years. And if he says it, don’t believe him.

Today a company can pay generous dividends, but a year later cut them significantly. This happens everywhere.

And vice versa. A company with a very modest dividend history can suddenly explode and start paying generous dividends.

Therefore, it is not worth betting only on high-dividend companies. Middlings should also be present in the portfolio.

Example. Dividends were not Aeroflot's strong point. In 2002, shareholders received a modest 6 kopecks per share. Sometimes the company did not reward shareholders at all. There were years when dividends were not paid. For 2021, investors received 17.5 rubles per share. And the company promises to adhere to a high dividend policy in the future.

Over 15 years, dividend payments have increased almost 300 times!!!

Reinvestment

Buying additional shares with dividends received is a free way to increase investment returns in the future.

For example, we received dividends at the rate of 10% per share. You buy new ones with them. The next year they earned 10% more in the form of dividends. And so every year. The compound interest rule applies here. Which, over long periods, can significantly increase both capital and annual profit.

As a result, in about 15 years you will already have 4 times more shares. And the annual dividend income will already be 40% of your initial investment.

And we don’t yet take into account that quotes can also increase significantly. As well as the size of dividend payments. Then the return will be even higher.

Use IIS to accelerate savings

1 From January 1, 2015, Russian investors have the opportunity to open an individual investment account (IIA). It represents a regular brokerage account with tax benefits.

IIS was created to increase the attractiveness of securities among the population. The attractiveness for ordinary investors lies in the possibility of obtaining tax deductions. The only condition for receiving a tax benefit is that the IIS must exist for at least three years (from the date of opening, not replenishment). You cannot withdraw part of the money. You can only close it completely. The maximum replenishment amount per year is 1 million rubles.

There are two types of tax deductions for IIS to choose from (you can only use one):

1. Type "A" (for contribution). 13% tax is refunded on the top-up amount. The maximum tax deduction per year is 52 thousand rubles (equivalent to 400 thousand rubles top-up). You can top up and receive a deduction every year. For example, you can top up by 100 thousand and get 13 thousand rubles.
2. Type “B” (for profit). Exemption from income taxes on IIS. This refers to all the profit received from the difference between the purchase and sale of securities. The tax on dividends and coupons remains.

When opening an IIS, the type of deduction is not indicated.

Most investors use the first type “for contribution”, since few people focus on long time horizons. This is beneficial for short investment periods.

The big advantage of IIS is that while it is open, there is no need to pay income taxes, as is done at the end of each year on a regular brokerage account. This allows you to speed up the accumulation effect.

I recommend reading the articles:

• IIS - answers to questions;
• How to get a tax deduction for IIS;

Note A person can only have one valid IRA. You can't open several at once. If you close it, you can open it again.

IIS often uses the simplest buy and hold strategy, which involves passive investing. That is, the investor simply buys shares and does nothing else. This is what we need to accumulate our portfolio of companies.

Pros of the buy and hold strategy:

• You don’t have to do anything, just buy shares when free money appears.
• You keep your money in the business.
• Don’t waste time on trading, so you can sleep peacefully and don’t worry about current fluctuations in stock quotes.
• There are no brokerage commission costs.
• Possibility of obtaining a tax deduction on income for the difference in purchase and sale prices if assets are held for more than 3 years.

2 The last plus is especially pleasant for long-term investors. If you hold securities for more than 3 years, you can apply for a tax deduction on profits.

For example, we bought a share for 100 rubles in 2015. If you don’t sell it until 2021, then after that you can sell the shares at a profit and get a tax deduction. If you sell for 200 rubles, then the net profit will be 100 rubles. If we had sold before 3 years, then 13% tax would have to be deducted from the profit.

Who are you, boss?

Let's first find out what kind of leaders are. This, of course, is not about personal qualities, but about their legal status. So, director, this is:

• hired manager. Everything is relatively clear with him. From the point of view of legislation, he is the same employee of the enterprise as a secretary, accountant or cleaner. According to the Labor Code, he has equal rights with them, but the responsibilities are those specified in the employment contract;
• one of the founders of the company (not the only one). Despite the fact that he is the owner of part of the business, an employment contract can and should be concluded with him in order to legally secure responsibility and his responsibilities as a manager. One of the founders can sign such an agreement;
• the person who founded the enterprise . That is, he is not only a director, but also the sole founder.

From our point of view, the third example is one of the most interesting.

Why is the dividend strategy so popular now?

In the media and blogs you can often see articles about young retirees. Those who have stable passive income and no longer work.

Due to the greater accessibility of the securities market, the dividend strategy has become so widespread. Anyone can buy securities without even leaving home. You just need to save up a sufficient amount.

It is also nice to keep your money in a business that generates profit, which is almost the only way to save your capital from inflation. Therefore, this method of saving is more effective than simply keeping money in a bank deposit or bonds. They increase there as a percentage, but the starting amount does not increase. And in a dividend strategy it will gradually increase, since the shares tend to grow.

So our initial amount of 10.733 million rubles in a year may already cost 11.040 million rubles. And this does not take into account the payment of dividends. But there may also be a drawdown. In this case, it will decrease in size. But drawdowns usually end with new growth.

How to increase profits from earnings on dividends?

Some may think that earnings from dividends are not as good as they might seem, but this is not so. To make sure of this, it is recommended to use the following methods to increase your profits:

• Opening an IIS instead of a brokerage account.
  An individual investment account, as you know, can offer a tax benefit of 52,000 rubles. This will affect the profit of a private investor who decides to make money on dividends.
• Increasing your bank.
  The logic is simple: the more money invested in dividend stocks, the more you will earn in the end. Important: you should never trade with credit money. This will not lead to anything good.
• Detailed market research.
  This is a must for all those who want to earn more and begin to understand investments even better!

This is how profits from dividends paid by a variety of companies increase! It is recommended to try them and start earning even more.

Risks of the dividend strategy

There are considerable risks of living only on dividend payments. Thus, during periods of crisis, the size of dividends drops significantly. Therefore, it is always worth having a financial safety net and alternative sources of income.

1 Fall in dividend payments. In this case, two options are possible.

1. Due to the general situation in the world. For example, there was a financial crisis and companies cut payments because revenues fell;
2. The investor fell into the so-called “dividend trap”. He saw that the company had previously paid substantial payments (more than 10% per annum) and decided that this would continue in the future. The drop in income can be very significant (several times). For example, from the estimated 600 thousand rubles to 100-200 thousand rubles. Of course, a smart investor will foresee such a situation in advance;

To be able to survive a crisis period, it is imperative to have cash reserves. It is best for this amount to be about twice the average annual expenses. In our case, this is 1.2 million rubles. This money can be put into a bank deposit or short-term OFZ. Profits from this amount can be used to accumulate your dividend stock portfolio. That is, reinvest the interest.

Also, for a stable life, it is desirable to have at least one one-room apartment for rent. This way you can ensure a stable passive income of 10-25 thousand rubles (depending on the city).

2 Risk of ruble devaluation. If the dollar becomes more expensive in rubles, then the shares will fall even more in price due to the flight of foreign investors. The investment portfolio may decline significantly. It will likely take several years for the value to recover.

Therefore, it is advisable to have part of the assets in foreign stocks or ETFs. They are less volatile and are quoted in dollars. If the ruble falls significantly, foreign assets will be able to compensate for these losses.

• How to buy foreign shares;
• List of protective assets and how to buy them;
• How to buy gold at the lowest cost;

Who pays dividends

In short, dividends are part of the profit received by a company, which is divided among the owners of shares of this company. However, you should be aware that not every company that issues shares pays dividends to their holders regularly.

You can find out whether it is possible to receive dividends from the shares you are interested in on the website, where there is a document describing the company’s dividend policy.

Front page of the Rosneft Dividend Policy

It is important to understand that the company does not guarantee or undertake to pay dividends to its shareholders. It announces its intentions to pay them, and the decision on the payment and amount of dividends is made, using the example of Rosneft, by the general meeting of shareholders based on the recommendations of the Board of Directors.