Making profit is easy in a bull market. But what when the sentiment turns and your assets’ value starts declining? Unsurprisingly, the stock market posed the same question more than once and has already come up with a solution. Investing in solid but high-yielding dividend stocks can make your portfolio fend off any hits it might take by market swings.   

What are dividends?

When buying a stock, you acquire a small fraction (share) of the company itself. If the company was profitable who do these earnings belong to? Right, they belong to the people owning the company. Simply put, the more of the company you earn, the more your vote counts, when it comes to decide what to do with the earnings. They might be reinvested into the company for further growth, they might be paid as “salary” to the top managers and they might be evenly split among shareholders. The amount you receive as shareholder is called dividend.

Not every company implements the same strategy when it comes to dividends. Some may decide to pay dividend rates that beat any other (reputable) investment form others may decide to not pay dividends at all. Which stock to pick could fill an article of its own.   

Why is a dividend investment strategy often superior?

Imagine buying shares of two companies, let’s call them “Carpenter Bros.” (providing carpeting supplies since 1920 with a solid business model but not very much potential of growth) and “Auto Drive Inc.” (a startup producing sensors for automated driving with huge growth potential). Your initial investment is 1000 USD per company.

• “Carpenter Bros.” earns steady profit rates and pays a dividend rate of 3%.  
• “Auto Drive Inc.” re-invests all earning in research and further growth of the company.

For easier understanding the examples below were simplified greatly and all tax related considerations have been left out. All dividends were re-invested.  

Case 1: Bull Market

In your first year after investing the stock market is booming and overall gains 5% in value. Both positions grow in value. Auto Drive Inc. was mentioned in the news for a potential cooperation with Tesla. Their stock value gains a whopping 10%.  Carpenter Bros. is also benefiting of the market developing but performing slightly below average gaining only 4%.  

Carpenter Bros is also paying out their 3% dividend, making the chart look less uneven.  

In year two market growth is still positive with an overall 5%. Auto Drive Inc. spends a lot of effort negotiating with Tesla, still growing 5% like the rest of the market. Carpenter Bros. is keeping up it’s solid effort and again gains 4% over the year. 

Congratulations! Your portfolio is performing great. Both positions have grown and despite Auto Drive Inc. having the higher ROI on the chart, the conservative Carpenter Bros. investment has the same ROI when it comes to looking at your account.  

Case 2: Bear Market

Shortly after your investment the market starts to plummet. Usually in such a case, the risky Auto Drive Inc. investment would lose more of its value than the solid Carpenter Bros. investment (note that in the bull market Auto Drive Inc. also gained more). I will leave out this effect to show, how even without considering the investment risk, the dividend stock is clearly advantageous. Both positions lose 5% of their value in year one after you invested.  

You can find some comfort at least when Carpenter Bros. pay out their 3% dividends, reducing your losses.  

Year two after your investment is still going down. Protectionism and trade wars are causing Dow Jones to lose another 5%. 

Despite market sentiment Carpenter Bros. is still doing good judging from a business performance level (existing since 1920 this is not their first financial crisis) and pays their 3% dividend.  

Luckily after two years the market bottoms out and stops its fall. It will take some time to regain former heights, however. Considering the two positions now trade in a horizontal corridor on the chart, Auto Drive Inc. will stay at 905.50 USD. Carpenter Bros. chart value will also stay the same but with dividends being paid constantly in one more year you will have regained ground to 986.18 USD and break even in the fourth year with 1015.76 USD. 

What can we learn from the stock market?

The two cases above have displayed the important role of dividends in the stock market. They act as insurance against swings in market value in bear markets and accelerate earnings in bull markets. You may have noticed many correlations to patterns and news reported in the crypto market over the past years. This brings forth the idea of applying the same concept of dividend investing to the crypto market.

Dividend Project 1: NEO Smart Economy

NEO is a Chinese blockchain project supporting smart contracts and offering DApps with its upgrade to the NEO 3.0 standard.

Just as with other blockchains, miners want to be rewarded and executing smart contracts also takes a fee. The special thing about NEO is that the fee is not paid in the main currency (NEO) but in a second token (GAS) especially invented for that purpose. Both NEO and GAS are capped at 100 million coins/tokens. Until that limit is reached an equal amount of GAS is distributed to each wallet holding one NEO. Holding two NEO will entitle you to twice the amount and so on and so forth. The cap should not bother you too much yet, as it should still take about 20 years until the last GAS token is released. This is because the amount released with a new block decreases every time.

NEO is traded on major exchanges such as Binance and KuCoin. To claim your GAS, I recommend transferring your NEO to your personal NEON wallet and holding it there. Although major exchanges like KuCoin also distribute the GAS to their users holding NEO, it might not be a good idea to hodl long term investments on a centralized exchange. 

Dividend Project 2: KuCoin Exchange

KuCoin is a popular Chinese exchange platform currently. Like many exchanges they created their own token, the KuCoin Shares (KCS). Holding enough KCS will get you a discount on trading fees, but there is also another, even more interesting characteristic to them. KuCoin Shares are called shares for a reason.

KuCoin implemented a bonus system that will distribute 50% of all trading fees earned by KuCoin to the token holders. This means, as long as you hold enough KCS, when somebody completes a trade on KuCoin, you earn a share of the fees. To prevent your account from being cluttered with dust of all the coins traded, KuCoin changed their bonus systems a couple of months ago and is now paying out all shares in KCS instead of different assets’ dust. You can claim your daily bonus in your account and the KCS you receive will immediately entitle you for additional bonus creating compound interest.

Do your own research!

This article was originally written quite a while ago and both projects mentioned here have since performed pretty well. Now, with new staking products, other opportunities to gain interest or dividends in the crypto economy have emerged. Be sure to research those as well!

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Disclaimer: No financial advice included in this article. Just my personal experience. Do your own research!

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Images courtesy of Unsplash.com or taken in-game

This is a re-published post from my account on the HIVE blockchain.