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Is earning dividends better than earning royalties?

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Is earning dividends better than earning royalties?

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I was recently watching a documentary about a pop band from Sweden (not ABBA.) which my girlfriend is crazy about. I also enjoy their music, although not quite as devoutly as her. What got me thinking though while watching was that they are enormously wealthy, and have been going for 30 years. The great thing for them, is that they continue to earn royalties from songs written over 20 years ago. Every time you hear one of their songs on the radio or being played in a store or restaurant, they earn a royalty. This led me to come to the realization that by becoming a Dividend Tycoon, you are in a way investing like a pop star!

Investing like a pop star

By purchasing a stock which is consistently profitable, and which pays out part of that profit as a dividend, you are in effect creating a stream of royalties for the future. Like the pop star earning every time their song plays on the radio, assuming you have some stock, you are earning every time:

  • somebody drinks a Coca-Cola or a Fanta (stock: Coca-Cola)
  • somebody cleans their house with Domestos (stock: Unilever)
  • somebody brushes their teeth with Colgate toothpaste (stock: Colgate)
  • somebody drinks a Guiness (stock: Diageo)
  • somebody drinks a coffee from Costa Coffee (stock: Whitbread)
  • somebody shaves with a Gillette razor (stock: Proctor & Gamble)
  • somebody eats a Pizza from Pizza Hut (stock: Yum Brands)

I think by now you see what I am getting at. The notion that you earn every time these things happen is very powerful. Warren Buffett himself once said that he sleeps well at night knowing that around the world millions of men have whiskers growing while they sleep. He owned a large chunk of Gillette, so he would have slept well!

Related: VIDEO: Investing In Gold

Dividends better than royalties?

In general, song royalties will decline as each year passes, due to newer songs coming along and people playing the older songs less. However with most dividend paying stocks the opposite is true. Most increase their revenue each year as they expand into new products and markets. Think of Starbucks, planning to open 500 new stores in China over the next year. The profit, and subsequent dividends should continue to increase for years, and hopefully decades, to come. The real dividend aristocrats such as Johnson & Johnson have over 50 years of steadily increasing dividends; you would be hard pressed to find many songs which can match that in terms of royalties.

So why not start your own pop band of stocks and start collecting those royalties? You could start to think about who your lead singer is going to be, or rather your main dividend spewing stock. Who will be the back up vocalists for reliable income, perhaps some property stocks? Who will be the bad boy drummer, perhaps a more risky IT stock that could go global? It is up to you, but investing like a pop star should pay off and eventually you may be as rich as the local royalty, like that band from Sweden.

Related: What are dividends? How are dividends taxed?

Article reposted with permission from Dividend Tycoon.

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Ross Malt is a full time investor and a part time writer. Through his site, he seeks to inspire people to reach financial independence (FI). He believes the best way to do this is to be a business owner, a tycoon. This does not need to be the traditional idea of a tycoon, such as a rail road owner or the owner of a chain of stores. You can buy stocks in profitable enterprises, which pay dividends, and through the magic of compounding, this can help you become a Dividend Tycoon. I like to share my stock research, ideas on how to invest successfully, the psychology of investing and my thoughts on reaching FI.

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