Should We Ditch our Dividend Stocks for 5.2% on Cash?

Summary

This video explores the dilemma of investing in dividend stocks versus holding cash, especially when cash interest rates are high. It explains why yield alone shouldn't drive investment decisions, highlighting factors like dividend growth and capital appreciation. The video also discusses the Bank of England's role in managing inflation through interest rate adjustments and the potential impact on savings and stock prices. It concludes with advice on balancing cash and stock investments based on time horizons and the importance of considering real returns for maintaining purchasing power.

Takeaways

• 🤔 High cash interest rates are prompting questions about the value of investing in dividend stocks with lower yields.
• 📈 Dividend stocks offer potential for growth in addition to yield, which can be overlooked when only considering cash interest rates.
• 💰 The script uses Exxon as an example to illustrate the concept of dividend growth over time, showing an increase from $276 to $380 per share annually.
• 📊 Dividend growth rate is a key metric for investors evaluating companies' dividend policies, alongside other factors.
• 📉 Capital appreciation is another benefit of investing in dividend stocks, as the stock price can increase over time, providing additional returns.
• 💡 The script emphasizes that yield is just one part of the equation when considering dividend stocks, and other factors must also be taken into account.
• 🏦 The Bank of England's interest rate decisions are driven by inflation, aiming to keep the economy on track by adjusting rates to control spending and borrowing.
• 📉 High interest rates on cash are likely temporary, as they are a response to inflation and are adjusted by central banks to maintain economic stability.
• 💸 The script suggests that for money needed within 5 years, cash may be a safer option, while stocks could be more suitable for longer-term investments.
• 📚 Real returns, which account for inflation, are an important consideration for investors looking to maintain or increase their purchasing power over time.
• 📝 The presenter offers a free PDF guide on dividend investing criteria for those interested in learning more about selecting dividend-paying stocks.

Q & A

Why might people consider investing in dividend stocks even when cash yields are higher?

Investing in dividend stocks can still be worth it because yield is just one part of the equation. Other factors such as dividend growth, capital appreciation, and the potential for higher returns over the long term are also important.

What is dividend growth and why is it significant for investors?

Dividend growth refers to the increase in dividends paid out by a company over time, indicating its financial stability and performance. It is significant because it signals a commitment to shareholder value and potential for future growth.

How does the bank rate affect the decision to invest in dividend stocks versus keeping money in cash?

When bank rates are high, cash becomes more attractive as it offers higher interest without the risk associated with the stock market. However, if bank rates fall, investors might turn back to dividend-paying stocks for better returns.

What is the role of the Bank of England in managing interest rates and how does it impact the economy?

The Bank of England manages interest rates to keep the economy on track. It hikes rates to control inflation and cool down the economy, and lowers rates to stimulate economic activity and encourage spending.

Why might an investor choose to keep money in cash for a short-term period?

For money that an investor is likely to need in five years or less, keeping it in cash is recommended because it offers stability and predictability, avoiding the risk of downturns in the stock market.

What is the concept of real returns in investing and why is it important?

Real returns refer to the actual increase in purchasing power or wealth that an investment generates after accounting for inflation. It's important because it indicates whether an investment is growing wealth in real terms or merely keeping pace with rising prices.

How does the script define the term 'capital appreciation' in the context of investing in stocks?

Capital appreciation refers to the increase in the value of an investment over time. In the context of stocks, it means the stock price has increased, providing a return on investment beyond just dividends.

What is the potential downside of focusing solely on yield when comparing cash and dividend stocks?

Focusing only on yield can lead to overlooking other important factors such as dividend growth, capital appreciation, and the company's financial stability, which can significantly impact long-term returns.

What is the significance of the sponsor 'trading 212' in the script and how can viewers benefit from it?

Trading 212 is a sponsor of the video and has provided a unique promo code 'divXP' or 'divvEXP' for viewers. By using this code when opening a new account, viewers can receive shares worth up to £100.

How does the script suggest investors should think about the trade-off between risk and reward when choosing between cash and dividend stocks?

The script suggests that investors should consider their investment horizon, with cash being a safer option for short-term needs and stocks offering potential for higher returns over the long term, despite the associated risks.

What is the script's stance on the sustainability of high interest rates on cash?

The script implies that high interest rates on cash are not sustainable in the long term, as they are often a response to inflation and economic conditions that fluctuate over time.

Outlines

00:00

🤔 The Dilemma of Choosing Dividend Stocks Over Cash Investments

This paragraph discusses the common question of why investors would opt for dividend stocks with lower yields when cash investments are offering higher interest rates. The speaker clarifies that this question arises from a misunderstanding of the reasons for investing in dividend stocks. The video aims to explain why investing in dividend stocks can still be valuable despite their relatively lower yields, emphasizing that there are other factors to consider beyond just the yield. The current high-interest rate environment, as illustrated by the Bank of England's rate of 5.125%, is highlighted as a new and puzzling situation for investors accustomed to lower bank rates. The video promises to explore the benefits of investing in the stock market and the risks involved, using the example of a company like Exxon, which has shown dividend growth over time, thus providing more value than just the initial yield suggests.

05:01

📈 Understanding the Multidimensional Aspects of Dividend Investing

The speaker elaborates on the concept of dividend growth, using Exxon as a case study to illustrate how dividends have increased over time, indicating the company's financial stability and performance. This growth is attractive to investors as it signals a commitment to shareholder value and potential for future growth. The paragraph also touches on the importance of considering capital appreciation, or the increase in stock price, as part of the investment return. The speaker warns against comparing yields with cash interest in a one-dimensional manner and acknowledges the risks involved, such as the possibility of dividend cuts or a decrease in stock value. The paragraph concludes with a discussion on the general recommendation to keep money in cash for investments planned for less than five years due to the potential for market downturns and the time needed for stock investments to recover.

10:02

🏛 The Impact of Inflation and Interest Rates on Investment Decisions

This paragraph delves into the factors influencing the Bank of England's interest rate decisions, particularly focusing on inflation. The speaker explains how central banks, including the Bank of England, use interest rates as a tool to control inflation by making borrowing more or less expensive. When inflation is high, interest rates may be increased to cool down the economy, while low inflation might prompt a decrease in interest rates to stimulate economic activity. The speaker also discusses the potential consequences of adjusting interest rates too much in either direction, such as causing unemployment or economic imbalances. The paragraph concludes with the speaker's personal investment strategy, suggesting that for money needed within five years, cash is preferred, while for longer-term investments, stocks are considered, especially if the interest rates on cash decrease.

💰 The Importance of Real Returns in Investment Strategy

The final paragraph introduces the concept of real returns, which refers to the increase in purchasing power or wealth an investment generates after accounting for inflation. The speaker points out that historically, interest rates on savings accounts have often been lower than the rate of inflation, leading to a decrease in real wealth over time. To combat this, financial experts recommend investing in assets that can potentially provide higher returns than the inflation rate, such as stocks or real estate. The speaker also mentions a free PDF guide on dividend investing criteria and encourages viewers to join an email list for updates and special offers, highlighting the educational nature of the content and the speaker's commitment to sharing valuable information.

Keywords

💡Dividend Stocks

Dividend stocks refer to shares in companies that pay out a portion of their earnings to shareholders in the form of dividends. In the video's context, the speaker discusses why investing in dividend stocks, even with relatively lower yields, can be advantageous compared to simply earning interest on cash. The script uses Exxon as an example, highlighting how its dividend yield has grown over time, which is a key factor for investors seeking long-term financial stability and growth.

💡Yield

Yield in the context of the video refers to the return on investment, specifically the income generated from dividend-paying stocks or interest from cash deposits. The speaker addresses the common question of why invest in dividend stocks when cash can offer higher yields. However, the video emphasizes that yield is just one aspect to consider and not the sole determinant of a good investment.

💡Interest on Cash

Interest on cash is the earnings one receives from keeping money in a savings account or similar financial instrument. The video script mentions that with interest rates on cash being higher than dividend yields, some investors may question the logic of investing in dividend stocks. However, the script also points out that cash is perceived as risk-free and that the interest earned may not necessarily lead to higher real returns compared to investing in stocks.

💡Dividend Growth

Dividend growth is the increase in dividends paid out by a company over time, which is an indicator of the company's financial health and commitment to shareholder value. The script uses the example of Exxon, showing that its dividend payments have grown from $276 per share in 2014 to $380 in 2024, illustrating the potential long-term benefits of investing in dividend stocks despite the initial lower yield.

💡Capital Appreciation

Capital appreciation refers to the increase in the value of an investment over time. In the video, the speaker explains that while dividend stocks may have a lower yield, they can offer capital appreciation, which is the potential for the stock price to increase. This is exemplified by the growth in Exxon's stock price from $96 to $121 over a decade, in addition to the dividends paid out.

💡Risk

Risk in investing refers to the potential for loss or the uncertainty of returns. The video discusses the trade-off between the perceived safety of cash investments, which offer a predictable return, and the risk associated with dividend stocks, which may offer higher long-term returns but also come with the possibility of market downturns and dividend cuts.

💡Bank of England Rate

The Bank of England rate mentioned in the video is the central bank's interest rate, which influences other interest rates in the economy, including those on savings accounts. The script discusses how this rate has been higher than usual, making cash a more attractive option for some investors. However, it also raises the question of how long these high rates can be sustained.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video script explains how the Bank of England uses interest rates as a tool to control inflation. High inflation can lead the bank to increase interest rates to cool down the economy, which in turn affects the attractiveness of cash investments versus dividend stocks.

💡Real Returns

Real returns are the actual increase in purchasing power or wealth that an investment generates after accounting for inflation. The video emphasizes the importance of seeking investments that can provide real returns, as simply earning interest on cash may not keep up with inflation, leading to a decrease in purchasing power over time.

💡Metronome Portfolio

The metronome portfolio is a strategy mentioned in the video that the speaker uses for investing in stocks. It is not fully explained in the script, but it is implied to be a method for managing investments over the long term, which contrasts with keeping money in cash for shorter-term needs.

💡Sponsorship

Sponsorship in the context of the video refers to financial support provided by a company, in this case, Trading 212, for the creation of the video content. The script mentions that Trading 212 has sponsored the video and provided a unique promo code for viewers, which is a common practice in content creation to support the production of educational or informative videos.

Highlights

Investors are questioning the wisdom of investing in dividend stocks when cash yields are higher.

The video aims to clarify why investing in dividend stocks with lower yields can still be advantageous.

Dividend stocks offer more than just yield; other factors such as dividend growth and capital appreciation are important.

Exxon Mobile (XOM) is used as an example to illustrate the concept of dividend growth over a 10-year period.

Dividend growth indicates a company's financial stability and potential for future growth.

Capital appreciation, or stock price growth, is another benefit of investing in dividend stocks, not just the yield.

The risk of a company cutting dividends or the stock falling in value is part of the trade-off when investing in stocks.

The video discusses the current high interest rates on cash and their potential duration.

Inflation is identified as a key factor influencing the Bank of England's interest rate decisions.

The bank uses interest rates as a tool to control inflation and maintain economic stability.

High interest rates can cool down the economy, but they must be managed carefully to avoid negative impacts.

When inflation falls, the bank may lower interest rates to stimulate economic activity.

The video suggests that unusually high interest rates on cash are unlikely to last, impacting investment decisions.

For short-term investments (less than 5 years), cash is recommended due to the risk of stock market downturns.

Long-term investments (beyond 5 years) are better suited for stocks, according to the video's perspective.

The concept of real returns, which accounts for inflation, is introduced as a reason to consider stocks over cash.

Investing in assets that can outpace inflation is crucial for maintaining purchasing power over time.

The video offers a free PDF guide on dividend investing commandments for those interested in further information.

Transcripts

it's a reasonable question when you look

at yields at 3 3.5 or 4% and when

interest on cash is paying 5% or even

more a lot of people are asking why even

invest in dividends and take the risk if

simple cash is paying higher it's

understandable why it's such a common

question however it comes with a deep

misunderstanding of why people invest in

dividend stocks in the first place in

this video I'll answer the question of

why investing in dividend stocks with

relatively lower yield can still be

worth it what else you need to look at

other than yield and finally how long

can such high rates on cash really last

hello and welcome back to the dividend

experiment the channel that helps you

build a portfolio that pays your bills

the content that we discussed is

intended for information and educational

purposes only and should not be

considered investment advice or

investment

recommendation at the time we making

this video the bank of England rate is

at

5.125% and as you can see from the chart

this rate is high well quite a lot

higher than it has been for the last 10

years or so as this is a relatively

novel concept for a lot of investors it

causes a puzzling Dilemma on the one

hand where Bank rates have been low

dividend stocks have seemed like a

natural choice if your bank barely pays

1% then a company paying 4% or more

seems like a great option to get some

income now however cash is perceived as

risk-free in that the nominal amount

doesn't go down or you can't lose it on

the market and you know where you stand

with the interest

does that mean that we should all ditch

our sub 4% yielding portfolios are there

benefits to investing in the stock

market and risking your portfolio amount

going down let's take a look first of

all we'll use 5.2% as a reference point

for cash here there are accounts that

have higher amounts but they usually

have some hoops to jump through such as

only being allowed to deposit a certain

amount or moving money around in order

to get the bonus or leaving it locked in

place for one or two years at a time etc

etc so we'll base it on 5.2 2% as I know

that right now you can get 5.2% on

uninvested cash with trading 2 again I

don't know when you're watching this

video and this rate may have changed in

the future but this is accurate the time

of making the video and talking of

trading 2 and2 they've kindly sponsored

this video on top of that I asked

trading 212 if they could give me a

unique code that you guys can simply

type into the promo code section Capital

At Risk so if you've opened up a new

account recently or planning to open an

account then here it is div XP or divv

EXP short for the dividend experiment so

you have 10 days from opening your

account to type this in and receive

shares worth up to £100 I also get

something is this is my custom code so

this helps you support the channel too

if you do use it thank you for your

support and thanks to training 212 for

sponsoring this video so 5.2% is going

to be our Benchmark here you can get

5.2% on cash the amount you put in won't

go down and you can predict exactly how

much you're going to get at the end of

the year of holding it a dividend stock

that pays 3% pays less out by the end of

the year and you have no true idea if

it'll be up or down by the end of the

year either why would you buy a dividend

stock that yields 3% instead of cash

it's because yield is just one part of

the equation there are more factors

involved when buying dividend stocks

let's use a real world example xon

mobile ticket symbol XOM M here's an

example I found it's not cherry pick to

prove a point it's a very common stock

though I think dividend investors might

probably hold and it yields about 3% so

it fits nicely as an example I think

so we have Exxon which has a dividend

yield of

3.14% and therefore it pays less than

the 5.2% cash if we only look at yield

it's an easy choice however here's a

couple of things I want to draw your

attention to let's go back to 2014 Exxon

paid

$276 per year per share actually paid

out four times a year or quarterly

amounts of 69 but the total for the year

was $2 and.

76 now in 2024 10 years later Exxon now

paid $380 a share per year or 95 cents

per share per quarter it's grown over

time this is the concept of dividend

growth dividend growth is the increase

in dividends paid out by a company over

time indicating its Financial stability

and performance this trend is often

sought after by investors as it signals

a commitment to shareholder value and a

potential for future growth of the

company the dividend growth rate

measuring the percentage increase in

dividends over time is a key metric for

investors evaluating companies dividend

policies alongside other factors of

course but again just yield and dividend

growth are not all the factors that need

to be taken into account now let's go

back to 2014 again Exxon was trading at

$96 exactly 10 years ago and if you

wanted to buy it today it's

$121 that means it's increased 25% in

that time as well as paying out the

dividends for the whole duration in fact

just since the start of this year it's

up about 18% if you looked at yield

alone and compared the cash of 5.2% with

a yield of 3% then you had have missed

out on the potential for capital

appreciation or stock price growth too

then longer term the amount each share

pays hopefully will increase as well

comparing yield with interest on cash is

too

one-dimensional however this doesn't

guarantee that dividends will perform

better than cash it could be the case

that the company cuts the dividends

meaning you actually get less income

rather than dividend growth the company

Falls in value so whilst paying you a

dividend the amount that you put into

the stock is less than when you started

obviously we want to avoid either of

these events and that is part of the

trick of investing in comparison to the

cash receiving 5.2% it's all a trade-off

of risk that you're willing to take if

you're planning to keep the money

invested for less than 5 years then the

general recommendation is to keeping

cash is there may not be enough time for

your investment in stocks to recover if

there's a downturn and this isn't my

financial advice to you by the way just

a generally accepted thought on the

difference how long will these interest

rates on cash really last now at the

beginning of the video video I said I'd

explore how long these unusually high

interest rates are likely to last first

we have to look at what caused that

massive change in the graph on the first

place so what caused that climb starting

from 2022 inflation imagine the bank of

England similar to other central banks

has a responsibility of keeping the

economy on track one of the most

significant aspects they have to monitor

is inflation which occurs when prices

rise over time now let's say the price

of items such as groceries clothes and

petrol start increasing too rapidly this

could indic that there's an excess of

money circulating in the economy so what

can the bank of England do about it well

one of its tools is interest rates when

inflation starts spiring out of control

the bank of England might decide to hike

up interest rates when interest rates

rise borrowing money from Banks becomes

more expensive consequently people might

think twice about taking out loans for

things like homes cars or launching new

businesses businesses might also scale

back their spending because borrowing

money for Investments becomes pricier

this reduction in spending and borrowing

puts the breaks on the economy and when

the economy slows down it can help

prevent prices from escalating to

rapidly so by increasing interest rates

the bank of England can help cool down

the economy and keep inflation in check

however they must be cautious not to

raise rates excessively or they could

risk slowing down the economy too much

potentially leading to unemployment or

even a recession it's a delicate

Balancing Act but it's all part of the

bank of England's job to keep the

economy running smoothly when inflation

Falls prices aren't increasing as

quickly as they used to so what does the

Bank of England do in this situation

well they might decide to lower the

interest rates and when the interest

rates drop borrowing money becomes

cheaper and people in businesses might

be more inclined to take out loans for

big purchases or Investments because it

costs them less to borrow money with

lower interest rates people might also

spend more because they don't get much

return from saving money in the bank

this increase in spending can give the

economy a boost which could help prevent

prices from falling too much or even St

stting so by lowering interest rates the

bank of England can stimulate economic

activity and then encourage spending

which helps the economy keep humming

along smoothly especially when inflation

is low however just like with raising

interest rates they need to be careful

not to lower rates too much or they

could risk sparking inflation back again

or other kinds of economic imbalances so

it's all about keeping the right balance

what happens if the bank of England Cuts

its rates for our cash if the bank of

England Cuts its rates then retail banks

will follow suit relatively quickly

after too they don't really want to be

offering more to the customers on

savings than the bank of England rate

and that means that interest rates fall

on savings and Savers and people who

want to return on their money need to

find somewhere else to put their money

maybe they turn to dividend paying

stocks again and what happens when a

large amount of money is trying to find

a home in a limited amount of stocks it

means that the price of the stocks will

go up that's just fundamentals of supply

and demand economics so saving in cash

and being late to interest rates

reducing means that you'll also be late

once again if you do eventually decide

to move back to dividend stocks as

prices will have potentially risen by

that point obviously this is some

oversimplified economics here and there

are way more factors at play but it

makes sense generally

speaking for that reason my own personal

thoughts and by my own personal thoughts

I mean not advice for you it's just how

I think about it so my own personal

thoughts on the cash versus dividends

dilemma is for money that I'll likely

need in 5 years or under I keep in cash

that doesn't have hoops to jump through

right now yes trading 212 seems to me to

be a very good choice for money that I

plan to keep invested for longer than 5

years I'll invest in stocks using the

metronome portfolio watch that video if

you have no idea what I'm talking about

finally I want to talk about something a

little higher level here and I think

you'll find interesting and that's real

returns real returns refers to the

actual increase in purchasing power or

wealth that an investment generates

after accounting for inflation in

simpler terms it's the return you get on

your investment after adjusting for how

much prices have gone up over time now

if we return to cash in the bank when

you deposit money in a savings account

or similar account at a bank you

typically earn interest on that money

however historically the interest rates

paid on savings accounts have often been

lower than the rate of inflation so in

other words the money you earn in

interest may not keep up with how much

prices are rising for example if you're

earning 2% interest on your savings

account but inflation is running at 3%

per year year you're effectively losing

purchasing power because your money

isn't growing fast enough to keep up

with the rising cost of goods and

services this means that even though

you're earning interest on your cash in

the bank in real terms your wealth is

actually decreasing because it can buy

less and less over time and this is why

Financial experts often recommend

investing in assets that have the

potential to provide returns higher than

the rate of inflation over the long term

such as stocks real estate or other

Investments by doing so you have a

better chance of growing your wealth in

real terms and maintaining or increasing

your purchasing power over time now I

hope that I answered your questions of

investing versus high rates of cash but

welcome to ask more in the comments if

you still have any if you liked this

video and if you made it this far I'm

guessing you probably did then I have

some good news for you I'm giving away

my PDF Guide to the 10 dividend

investing Commandments or the criteria

that I use to pick dividend paying

stocks and I'm giving it away to you for

free all you need to do is submit your

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