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One of the less talked about aspects of making your money work for you is the psychological aspect. We are, after all, only human and come with a range of biases and whims we can’t control. And when it comes to our hard-earned money, it’s quite difficult to let go of them, especially when trying to build passive income through the short term erratic behaviour of the stock market.
Pros and cons
Imagine investing for the first time in early 2020. I remember quite vividly what it felt like to watch my portfolio crash as the pandemic gripped the world. For a short time, it seemed like lockdowns would last a decade, the stock market would flounder and everything I’d worked towards in my life was going down the toilet.
If that was my first time investing I might have wondered why on earth I would subject myself to such a feeling and would have thought: “This is definitely not for me.”
On the other hand, if I’d invested after the recession in 2009 it would have been quite the opposite. The recovery was swift for the FTSE 100. Investing in the index in March 2009 would have given me a 46% return in just a year.
I might have put in £1,000 and quickly seen it shot up to £1,460 or thereabouts and thought: “This is definitely for me.”
Sending us some cash
While we can’t remove the element of timing entirely, we can limit its effect on our brains. One way to do that, and I think a great place to start for newer entrants to the world of investing, is dividends. This is where a company shares a portion of the profits directly. They literally send us the cash.
Therefore, even in a down year, we’d expect to see a tangible pile of cash in our accounts. And the FTSE 100 shines with many such big-paying companies that investors prize for reliable and large dividend payments.
Big fry
One company like this, and one I hold myself, is Legal & General (LSE: LGEN). It operates in London’s large financial sector and earned revenue of £9bn last year against a market cap of £13bn. The company isn’t small fry, and neither is its dividend.
The forward dividend yield has been rising and now sits at 9.05%. That much cashback would make a pretty sight for a first £500 investment.
L&G has a strong balance sheet and earnings that are growing. These are signs that this isn’t just a stock to buy for a single year of payments, but that it can provide a good place to grow money over the longer term too.
Dividends aren’t guaranteed, of course. Lowered interest rates, if and when they come, will eat into margins a little. The looming threat of a possible global recession was brought more sharply into focus in recent weeks and that’s another point to be cautious of.
But for a first foray into stocks, I think targeting a big dividend payment can do a lot on the psychological side of things. It’s nice to see your money working for you and that’s what a chunky dividend provides in the form of a very real bundle of cash sitting in a brokerage account.
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