Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

Let’s find YOUR path to financial freedom…

  • The median age in the U.S. is 36.8
  • The median income in the U.S. is $51,939
  • The average 401k match is $1 for $1 up to 6%

A 36.8 year old investing 10% of their $51,939 income with a $3,116.34 match:
With just average stock market returns of 10% would have $1,114,479.31 by retirement.

Join 21,000+ other readers who have learned how anyone, even beginners, can easily make this desire a reality. Download the free ebook: 7 Steps to Understanding the Stock Market.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market

Welcome to this 7 step guide to understanding the stock market. I’ve created this easy-to-follow Investing for Beginners guide to simplify the learning process for entering the stock market.

By leaving out all the confusing Wall Street jargon and explaining things in simple terms, I’m hoping you’ll find this as the perfect solution, if you are willing to learn.

Before we get started, here is a breakdown of the 7 categories for the official Investing for Beginners guide.

1. Why to Invest?
2. How the Stock Market Works
3. The BEST Stock Strategy and Buying Your First Stock
4. P/E Ratio: How to Calculate the Most Widely Used Valuation
5. P/B, P/S: The Single Two Ratios Most Correlated to Success
6. Cashing In With a Dividend Is a Necessity
7. The Best Way to Avoid Risk, and Putting it all Together!!

Why is investing so important?

Let’s imagine a life without investing first. You work 9-5 for a boss all your life, maybe get a couple raises, a promotion, have a nice house, car, and kids. You go on vacation once a year, eat out regularly, and attempt to enjoy the finer things in life as best you can.

Now since you haven’t invested, you get old, become unattractive for hiring, and live with a measly social security allowance for the rest of your life. You might’ve made good money when you were young, but now you have nothing to show for your lifetime of work.

Now let’s say you did save some money for retirement, but again this money wasn’t invested and won’t be invested.

Let’s even stay optimistic and assume you saved $1400 a month for 26 years. This would leave you with $403,200 to live on, which on a $60,000 a year lifestyle would only last you 6.72 years. You’re retiring at 65 only to go broke at 71 and you’ve been a good saver all your life.

Well then what’s the point of saving you may ask? Now let me show you the same numbers but add investing into the equation.

The Power of Saving + Investing

Again, lets say you saved $1400 a month for 26 years. BUT, this money was invested continuously as part of a long term investment plan, solid in the fundamentals you learned from this investing for beginners guide.

Now, including dividends in long term stock market investments, I can confidently and conservatively say that you can average a 10% annual return on these investments.

The same $1400 a month compounded annually at 10% turns your net worth into $2,017,670.19 in 26 years!

But the story gets even better.

With this large sum of money at your retirement, again conservatively assuming a 3% yield on your dividends, you can collect $60,530 a year to live on WITHOUT reducing your saved amount.

investing for beginners

Answer: Compounding Interest

By letting the power of compounding interest assist you in saving, you leverage the resources available in the market and slowly build wealth over time.

It’s not some mystified secret or get rich quick shortcut; this is a time tested method to become wealthy and be financially independent, and it’s how billionaires like Warren Buffett have done it all their life.

For those who don’t want to think about tomorrow, I can’t help you. But tomorrow will come, it always does.

Would you rather spend the rest of your life with no plan, dependent on others and unsure of your future? Or would you rather be making progress towards a goal, living with purpose and anticipating the fruits of your labor you know you will one day reap for years after you sow?

The choice is yours, and only YOU will feel the consequences of that choice.

[continue reading…]

The History of the S&P 500 Yield Proves Investing Can Change Your Life

I always talk about the importance of benchmarking your performance vs the index and I really think that doing this with a dividend is no different.  In fact, it’s debatably even more important!  So, that begs to question – what is the S&P 500 yield?

A quick google search will show you that the yield is actually about 1.77% right now, but that’s now what I’m necessarily talking about!  Sure, the current yield is extremely important, but as always, we need to get much more into the numbers than that!

Personally, I almost view the term “yield” as the total return that an investment might generate.  In the case of the stock market, that is simply the share price appreciation + dividends.

Sure, a stock might pay a dividend yield of 8%, but if the share price declines 5% then you only made 3% in total.  Sure, 3% is still 3% more than you would’ve made otherwise, but it’s 8% less then the Stock Market average since 1950.

Below is a chart that I put together to breakdown the average return and the average yield since 1928, 1950, 1975 and 2000:

I really like to look at this type of data because I find that it gives me a great perspective when I am looking at my investments.  I have talked in the past about how when I am able to benchmark my performance vs an index like the S&P 500 then it helps me be a rational investor, so this is incredibly important to understand!

So, along with benchmarking your performance, what else can this data tell you?

[continue reading…]

Utilize This Free Dividend Payout Calculator to Maximize Your Returns!

Dividend stocks are something that intrigues so many people yet so many people have no idea what to even look for when they’re evaluating those companies.  Personally, I think that the payout ratio is one of the most important ratios to consider, but do you know how to properly use it?  If not, don’t fear, the dividend payout calculator is here!

I feel like people love dividend stocks for one of two reasons:

  1. They can use the regular payments to live off of
  2. They will reinvest those dividends to buy more of the stock

There are obviously other reasons for loving dividends such as how they are realized gains, but I really do think that these are the main two reasons.

I actually follow a lot of accounts on Twitter that talk about how their goal is to live off of dividend payments and personally, I kinda love this goal but also am a bit fearful, because companies can cut their dividends at literally anytime without any heads up. 

Now, companies know that if you have a great track record of paying a dividend, then cutting it is a major sign of bad things to come, so they will oftentimes avoid that at all costs, but it can still happen.

And honestly, the fact that companies know that cutting a dividend is a really bad sign means that when it actually happens, things are really, really bad.  But this just brings light to companies like Johnson & Johnson and 3M, who are both Dividend Kings, meaning they have increased their dividend for 50+ years…which is just bonkers!

And then there’s those people (like the three amigos (Andrew, Dave, and myself…lol)), that love dividend paying companies because it’s the ultimate compound interest.  Think about it in a vacuum:

If you invest $1,000 into the stock market and you earn 10%, then you have $1,100 after year 1, right?  So, the next year, you would earn another 10% but now it’s on $1,100, meaning you now have $1,210. 

So, you basically made an extra $10 in Year 2 because you were making money off of your gains from Year 1!  So, the more time in the market, the more you can make.

But with dividends, all of the same logic applies, but you have a little extra bonus because you’re making even more money on those extra dividend payments that you’re getting! 

While it’s not an insane amount, the average across the S&P 500 as of July 2020 is about 1.88%, so that’s above and beyond the market price that you see.  So, $1,000 in the market means you get $10.88 in dividends.  That’s not a ton, but that’s all bonus!

Important Dividend Metrics

But dividends aren’t easy.  You see, a lot of people get wrapped up in the dividend yield but that is literally one of the worst things that you can do.

Because the dividend yield is simply taking the Dividend per share/share price, you’ll find people that want the highest yield but they don’t realize that a high yield might mean something really, really bad. 

For instance, if a company offers a $1 dividend and their share price is $50, then the Dividend Yield is 2% ($1/$50).  But if the share price drops to $20 and the dividend stays at $20, that means the yield is now 5%.  Is that a good thing?  To me, that’s a major red flag that bad things might be on the horizon…

But even more important than the dividend yield is the dividend payout ratio!

The payout ratio is also a very simple formula to calculate, so no sweat on that part!

All that you need to know is the Dividend/Share (DPS) and then the Earnings/Share (DPS), both are extremely easy values to find!

[continue reading…]

Making the Jump From APT to House? A Piggyback Loan Might be For You!

Trying to scrape up the money needed to put money down on a house can be so incredibly hard, especially if you haven’t been planning for it that long or that it’s your first home.  One option that many people don’t consider, or at least don’t use, is a piggyback loan.

I talked a little bit about piggyback loans and their usefulness previously when I was comparing multiple different down payment options, but I think that it really deserves a bit more of its own spotlight.

So, what even is a piggyback loan?

Well, it’s simple – you simply will put down 10% as a down payment for the home, take out a mortgage on 80%, and then takeout a second loan/mortgage on the remaining 10%.

You might immediately be thinking, “Andy, I do not want a second MORTGAGE!  Simply the sound of that sounds awful.”

[continue reading…]

Average Discount Rate for the Top Companies in the S&P 500

Setting a reasonable discount rate is critical to getting a reasonable valuation. Like with history, I believe that getting context on averages, in this case the average discount rate, throughout a large portion of the stock market will help you figure out if your chosen discount rate is reasonable or not.

A discount rate is a small piece that is integral to a Discounted Cash Flow (DCF) valuation, which is also denoted as a “WACC” Weighted Average Cost of Capital, or Cost of Equity (if no debt involved).

Those topics discussed above are worth a read after this post for more insight and application of the average discount rates you’ll learn about today.

The Basics of the Discount Rate

If I had to explain a discount rate to someone who knew nothing about it, I’d first simplify it like this:

  1. A higher discount rate = lower valuation
  2. A lower discount rate = higher valuation

So, if you chose a higher (more conservative discount rate), the value of the cash flows that you are estimating are less. Same goes the other way.

Why do we need a discount rate in valuation?

Well the premise of an investment is sacrificing cash now to get a cash flow later. Ever heard of the phrase, “a bird in the hand is worth two in the bush”?

[continue reading…]

Financial Accounting for Beginners: Debits/Credits, P&L, Assets/Liabilities

Recently, Berkshire Hathaway earned $81.4 billion in 2019, a 1900 percent increase from the year before! How was this possible, by an accounting rule that was instituted in 2018 that requires companies to include in their bottom line gains from its stock portfolio, even if the stock is not sold. Buffett vehemently disagrees with this accounting rule but follows the letter of the law.

The above example illustrates the importance of financial accounting and understanding how accounting works; it can have a huge impact on your investments if you don’t understand how to read financial statements and the ramifications of new rule changes such as the one above.

To be a great investor doesn’t require that you become a CPA, rather it requires you to understand financial accounting for beginners. Have a basic idea of how to read financial reports and understand the correlation between the documents.

In this post, we will cover many of the basics of accounting and try to provide you with an overview of how accounting works and some of the important features to understand. Like learning any language, the language of business is spoken in accounting, and having a basic understanding will help you speak in business.

Knowledge compounds and you will find, like everything, the more you learn, the easier it becomes to learn more, and it continually compounds. To start, we first need to cover the basics and grow from there.

In today’s post, we will learn:

  • What is Financial Accounting?
  • What are the Basics of Financial Accounting?
  • Components of the Basic Accounting Equation
  • Financial Statements – An Overview

Ok, let’s dive in a learn more about financial accounting.

[continue reading…]

GAAP Accounting Rules: The 4 Basic Principles Investors Should Know

Accounting is often thought of as this dry profession that we only need to consider around tax time, but if you are an investor, understanding how accounting works on a basic level is important if you are going to analyze businesses on any level. GAAP accounting rules are the primary force behind financial accounting, and today we will learn more about this exciting topic!

I took several semesters of accounting in college, and to be frank, I don’t recall much about the classes except for the pretty girl that sat in the desk right in front of me. In hindsight, I wish that I had paid more attention to the teacher as it would have come in handy in my investing life.

Part of becoming a better investor is understanding the business that you want to buy, and part of learning that business is understanding the language that business speaks, which is financial accounting. Part of understanding that language is having a foundation in GAAP accounting and the rules surrounding GAAP.

Buffett and Munger both have strong opinions on the understanding of businesses and the language of business, which is accounting.

“You need to know how figures are put together, but also have to bring something else. Read a lot of business articles and annual reports. If I don’t understand it, it’s probably because the management doesn’t want me to understand it. And if that’s the case, usually there’s something wrong.”

Warren Buffett

“Asking Warren what good books he knows about accounting is like asking him what good books he has on breathing. You start with basic rules of bookkeeping, and then you have to spend a lot of time to really become knowledgeable.”

Charlie Munger

Topics we will discuss in today’s post:

  • What is GAAP Accounting?
  • What are the Four Principles of GAAP?
  • Compliance with GAAP
  • GAAP versus Non-GAAP: What’s the Difference?
  • GAAP versus IRFS

Ok, let’s dive in and learn more about GAAP accounting rules.

[continue reading…]

How to Calculate Invested Capital for ROIC (the right way)

Do you know how to calculate Invested Capital the right way? Did you know there’s two different equations for the same Invested Capital formula, and they mean two different things?

I’ve seen the words Invested Capital tossed around lightly many times online, and while the intentions are good, the execution is not. Oftentimes, I hear Invested Capital referenced as the denominator for ROIC, especially among investors.

When Invested Capital is being referenced, it could mean two things:

  1. Operating Invested Capital
  2. Invested Capital for equity holders (investors)

As investors who are trying to use ROIC to find good investments, you might think that we’d want to use the Invested Capital formula for equity investors (#2) to make our best apples to apples comparison.

But that’s not the case– if you’re trying to use ROIC to find a great business model.

ROIC is often used to help identify businesses who have a very high cash flowing, or efficient, core business. In other words, great operations.

Because like Warren Buffett once said,

“I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

We have to understand that there’s several distinct parts of a great business:

  1. Great capital allocations (CEO)
  2. Great financing decisions (CFO)
  3. Great operations (COO)

Let’s dive into all 3, because they are each critical but distinct, and we need to understand each to understand how to calculate Invested Capital properly and instinctively know which is best to use.

This works really well for evaluating businesses as stock picks, by the way.

[continue reading…]

4 Tips to Strengthen Your Risk Appetite for Investing in the Stock Market

Have you ever heard that the stock market is risky and that you’re going to lose all of your money?  I know that I have heard that a billion times and friends, I am here to tell you that it’s just not true.  As long as you know your risk appetite and you stick to it, then you’re going to be just fine.

I’m not going to lie – investing can be extremely stressful.  If you’re anything like me and you refresh your investing app frequently then you’re going to see it go up and go down; go up and go down, nonstop, over and again.  Oh, 5 more minutes is up?  Let’s refresh it again!

I was like that when I started investing and while I don’t think that was a healthy habit of mine, I do think that looking at your portfolio daily is a good thing to be honest.  So how do you determine your risk appetite?

I think you just really need to do a good self-evaluation of yourself.  Can you stomach losing half of your money in the span of a few months?  It can absolutely happen.

A stock market crash will happen.  It’s not like a “what if”.  It’s a guarantee.  It’s part of investing.  Investing is very volatile but it only becomes risky when humans get involve and start to mess everything up.

Vanguard has a pretty cool risk appetite questionnaire, and I know this sounds ridiculous, but almost think you should ignore the results.  I think that the questions are great questions, such as:

[continue reading…]

Should Dividends Be Reinvested? Handy Andy’s Lessons!

If you’re asking me, “should dividends be reinvested?” then I am telling you that the answer is always a resounding YES!

Now, if you’re asking me if those dividends should be reinvested back into the same stock that earned those dividends, that is a much different question! But don’t worry, I’m here to help cut through some of the nonsense and get you an answer that will help you properly invest your dividend income!

Have you ever heard that “time in the market beats timing the market?”  Well, it’s 100% true, and the numbers show it.  Statistically speaking, when you have money that you want to invest, you should try to get that money into the market as fast as you can!

I’m telling you right now that you should NEVER dollar cost average if you’re seeking maximum returns.  I know that might seem like a hot take but it’s true.

I mean, think about it – the stock market has historically gone up over time, on a fairly reliable business, so wouldn’t it make sense to put your money in as fast as you can? 

Of course, sometimes it will backfire, but the odds say that if you were to put your money in today then it’ll be at a lower price than what it would be if you invested tomorrow.

When comparing lump sum investing vs. dollar cost averaging you can see that it’s a no brainer that you should get your money into the market as soon as you possibly can, and the same remains true for dividends. 

So, as soon as you get those dividend payments, put those funds back into the market so you can continue to capitalize on compound interest!

Is the DRIP Program Still Relevant?

Now, chances are that you are asking this question because you have heard about DRIP, or Dividend Reinvestment Plan, and you’re wondering if this is applicable to you.  Well, to be totally honest, I don’t know if DRIP really is that applicable anymore…

DRIP essentially is that when you earn a dividend, that money then is automatically invested right back into that same company that paid you the dividend in the first place.  So, let’s imagine this scenario:

You’re invested in one of the greatest dividend kings of all time in 3M (MMM) and you own 10 shares of that company.  On 5/21/20, MMM paid its quarterly dividend of $1.47/share, and since you own 10 shares, you received a total payment of $14.70. 

You can either receive this as just cash in your account or you can enroll in DRIP, meaning that you will instantly get more shares of MMM for the equivalent of that dividend payment.  Let me help explain below:

As you can see, that $14.70 in dividend payments is enough to get you .1008, or just over 10% of 1 more share.  You now own 10.1008 shares instead of the original 10, meaning that the total value of your stock is at $1,472.80, or $14.70 over the amount of your initial investment (which is the same as the dividend that you received).

The beauty is that you could just keep this going, quarter after quarter, because 3M has one of the most sustainable track records of growing their dividend over time that you don’t have a lot to be worried about with them cutting their dividend, but is this actually the best strategy for you?

DRIP really provided (note that this is past tense) three main benefits to the common investor:

[continue reading…]

IFB163: Dividends, Diversification, and Reflections on the Approach

Announcer (00:00):

You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave (00:36):

All right, folks, we’ll welcome to Investing for Beginners podcast episode 163. Tonight, we are going to answer a listener question. We got a great question from David recently, and Andrew and I are going to take part, his question. It’s quite extensive, and there’s lots of great stuff in here. So we’re going to go ahead and answer that for David on air. So I’m going to go ahead and start and say, hi, Andrew. Thank you for all the resources you put together as a 25-year-old, who had no foundational understanding of stocks, your podcast has been immensely helpful. Hoping you could fill in some gaps. I currently have. The first thing you’d like to talk about is dividends. So do a little rapid-fire here. So dividends, are they pay out quarterly yearly or variable? Andrew?

Andrew (01:22):

Yeah, it depends on the company. Most are quarterly.

Dave (01:26):

Perfect. What is the period between when a company determines a dividend versus when it is paid?

Andrew (01:33):

It depends. So what I like to do for a stock is I’ll Google. Let’s say I want to look at Apple’s dividend history. So I’ll just put in the ticker APL dividend history. And I like to use the NASDAQ website because it will show you the dates that they’ve announced, the dividend payout, the date, you have to hold the stock, buy to get the dividend payout, and then the date that you will receive the dividend in your brokerage account. And so, you know, that website has it, some other websites do have it. So there’s not like this golden period between those different deadlines, I guess. And you know, sometimes it could be a couple of days later, a couple of days early with announcing and everything like that.

Dave (02:17):

But that’s just the general thing with dividends, correct me if I’m wrong, but every company is on their schedule, correct?

Andrew (02:27):

I mean, I know that’s, I’ll get like groups of dividends and in my email any given day. So it seems like some might be on similar schedules, but yeah. It’s pretty random, for the most part.

Dave (02:40):

Okay. Right. So Wells Fargo is going to pay their dividend regardless of when JP Morgan or bank of America or it’s not really dependent on each other.

Dave (02:49):

Yeah. Okay, perfect. Alright, next question. How long must you hold a stock before you’re entitled to a dividend? And is this determined by the time you hold the stock or the time between stock purchase and dividend announcement?

[continue reading…]