Members of my family would sooner discuss genital warts than my income or investments.

And to be honest, like most Brits I find something admirable in this.

Talking about money all day gets dull and weaselly. Swapping business ideas or debating undervalued stocks over a few beers is my idea of fun, but even I don’t ask my friend if he can really afford the next round of drinks.

Tell people you dream of owning a Ferrari dealership in every city and you’re a potential Richard Branson. Say you want to buy a Ferrari out of your spare change, and you’re an evil, money-grabbing maniac, who’s no better than an… American!1

Yet in truth there’s a huge price we British pay for our national reticence about money – whether you’re at the bottom of the ladder struggling with debt, or further up and ready to take your wealth to the next level.

Talking about money can save your life

For too many spouses, the first time they hear about their partner’s mounting debts is when they become so big they threaten to bankrupt the family.

How can a partnership as supposedly intimate as marriage be oblivious to such a secret? It’s because our reluctance to discuss money means the problem grows hidden rather than being aired and hopefully solved.

Ironically, the conversation that follows a full revelation can bring a drifting couple back together. The other party sees that the unspoken money issues had created the distance between them; it wasn’t a lack of love but a fear of debt that was driving them apart.

How silly! What a worthless thing money is compared to love! What a ridiculous thing to split up a marriage!

Controversial, you say?

I’ll say it again:

What a worthless thing money is compared to love.

Money is just a tool. It’s a vital tool, certainly, and Monevator is about handling it expertly, so that it works for you rather than against you.

But money is just a means to an end.

Wealth is a way to enjoy a richer life. In contrast, a life rich in money but nothing else is poorer than that of a developing world farmer surrounded by laughing friends and family, provided he has access to decent food, health, and water. Just ask anyone who’s traveled widely.

We should speak about money when it threatens to overwhelm us. We should share our dreads, take the sting out of money, and figure out how to overcome cashflow problems as if they were no more emotionally-charged than mending a fence or choosing a restaurant.

Easier said then done, but that should be our aim.

You can talk yourself rich

I said an aversion to discussing money could also harm the wealthy.

This works in two ways.

Firstly, if you avoid sharing your ambitions about money, your brain could well interpret money as something to be ashamed of, and you’re unlikely to commit wholeheartedly to becoming rich.

Rock stars, great athletes, models – few were shy about revealing their ambitions before they achieved them. Saying they’d get there over and over helped them believe it, and they needed that belief to make it.

It’s often the same with the self-made rich, whether they’re famous entrepreneurs, or more modest Millionaires Next Door.

Secondly, nobody wastes money like the moderately well-off.

The rich may buy fancy watches and take holidays in the Virgin Islands, but as a rule they didn’t become wealthy by spending all their spare income on hedonism.

Such ostentatious outgoings are typically just a fraction of their overall wealth. Most money goes back into their businesses and investments, or else into unseen assets like property, art, furniture and their children.

In contrast, middle-class families can fall into a spending cycle that sees them seesawing in and out of the red. Yet should anyone close to them get qualms about their spending, the fear of discussing money – the knowledge that even bringing it up will cause an emotional row – holds their tongue.

Who knows? Your partner may be thinking exactly the same thing as you, but is equally afraid to say it.

You may both be longing for a more stable, less Keeping Up with the Jones’ driven lifestyle, but instead you could struggle with your finances into your old age out of fear of a conversation.

Money talks, bullshit walks

Don’t be afraid of talking about money, if you want to have any.

I’m not saying you need to grab your postman or your kids’ schoolteachers and tear their ear off about the joys of compound interest.

But among the significant people in your life – immediate family, key friends on the same ‘money wavelength’, and perhaps even your boss or certain work colleagues – money should be no more a taboo subject than sports or politics.

Don’t push it. Not everyone is on the same path as you, and it’s hard enough to change your own thinking, let alone your friends’ attitude towards money.

If you’re in a relationship then I think you need to be able to talk about money sensibly and straightforwardly with your partner. For me, that’s non-negotiable if I’m to avoid problems further down the line.

Friends and especially colleagues are another matter, and you need to be sensitive here.

Try bringing up the subject a few times, one-to-one with a trusted friend. Mention investing in one conversation, your hopes for your retirement income another. Maybe try bringing up debt, in as neutral a manner as possible, and see what they say.

Ideally, your friend will pick up the baton and you’ll have a new ally in your quest to become good with money. You can swap ideas, gee each other along when times are tough, and enjoy each others’ success.

However if your friend is resistant, don’t push it if you value your friendship.

There’s much more to life than money, and friends for all sorts of roles. You have to accept this friend isn’t going to be on your team when it comes to financial matters. If he or she starts ranting about the ‘lucky rich’ or bemoaning a lousy salary and generally being negative, tune it out and think about your share portfolio.

Your friend will soon take the hint and assume you’re another of the millions who doesn’t like to talk about money. The conversation will turn to football or gossip about some starlet. No harm done.

Pucker up!

One final point – when you’re comfortable talking about money, I believe you’ll encounter more opportunities to make it.

This isn’t some mystical mantra. It’s common sense.

If you can talk about money without judging the other person or getting emotional, successful people will be more than happy to chat to you about it. You’ll discover new business opportunities, new perspectives on investment, and you’ll become accustomed to living in a world where money is seen as a positive thing, rather than a problem or dread secret.

Ultimately, talking about money is like kissing. Don’t overdo it, and don’t shove it down other people’s throats, but enjoy it when you get the chance. And never be ashamed of it if you’re doing it properly.

1. Important note to my US readers. Some of my best friends are American! I am merely discussing a national caricature. Blame television. [↩]

A bit of gloating, then some good reads from around the web.

Very nice news reached the velvet-lined inner city bunker that is Monevator HQ this week – we have been nominated for a second time as the ‘Best International Personal Finance blog’ in the Plutus Awards!

Now into their third-year, the Plutus Awards are becoming established as the benchmark for personal finance blogging. Given the vast plethora of blogs out there, it’s very pleasing to make the shortlist in the International category.

Now I know what you’re thinking – Monevator has run the odd article on overseas investing, but it’s not really a blog about international personal finance, is it? We’re many things, but a go-to resource for globetrotting playboys and It girls we’re not. (More’s the pity!)

But in the context of the Plutus Awards, international basically means ‘not American’. This is the country that runs a ‘World Series of Baseball’ that’s populated entirely with U.S. teams, remember.

I’m only teasing, of course – I’d do exactly the same thing if I launched blog awards from here in the UK. Plus, I’m not sure how kindly the judges will look on ironic British asides… 😉

Anyway, other contenders in our category include the up-and-coming UK bloggers at Sterling Effort, Yorkshire-based Miss Thrifty, sometime Monevator visitor Frugal Zeitgeist, and a new blogger to me, Kylie Ofiu.

Naturally, I wish all the contenders the best of luck.

[continue reading…]

Whether your aim is to maximise current income or grow your capital, buying shares that pay dividends can be a good match for individual investors who want to directly hold a portfolio of shares, but who don’t want to succumb to excessive trading and speculative activity.

Though it’s been nice to see the increased interest in dividend shares over the past few years, there remains a lot of misunderstanding about dividends, the proper way to manage a dividend portfolio, and how to separate good dividend shares from bad ones.

In the next few months, my aim is to start from the ground up, to help create a lasting source of dividend education for and with the Monevator community.

What are dividends?

To understand what dividends are, first we must review what a share represents to an investor.

When you buy a share of a company, you’re literally doing just that – buying a share of the company itself – and by doing so you become part-owner of that business. You may not have much say in the company’s day-to-day operations, but you nevertheless get to share in the company’s profits and normally receive the right to vote on corporate policy.

As a company grows and matures, it typically becomes more profitable (otherwise it probably wouldn’t have lasted that long) and produces more cash flow. Concurrently, however, the maturing company frequently finds that it has fewer suitable investments in which to reinvest all the extra cash it’s generating.

When this happens, companies often decide to return some of the extra cash to shareholders in the form of dividends rather than hoard it or reinvest it in value-destroying projects. And because you own a fractional share of the company, you are entitled to receive your proportional amount of the dividend paid to shareholders.

We’ll discuss dividend policy in more detail in a future part of this series, but for now the important thing to remember is that dividends are cash paid by companies to shareholders.

This may seem elementary, but it is an absolutely critical concept to remember when evaluating dividend-paying shares: unless the company generates more than enough cash to sustainably fund the dividend, the dividend is more likely to be cut or suspended.

From time to time we hear about companies cutting their dividends, and there’s always a group of investors that didn’t see it coming. In future articles, I will introduce ways to notice a risky dividend by paying attention to cash flows and a company’s financial health.

What dividends are not

One common misconception about dividends is that they’re paid out of a company’s profits.

It’s easy to see why some investors may think that’s the case as the ‘dividend cover’ ratio – earnings/dividends – is the primary dividend health metric found in financial data sites and analyst reports.

The problem is that earnings are an accountant’s opinion and do not 100% translate into tangible cash. A company with aggressive accounting policies, for example, can artificially boost reported earnings for a time whilst generating less actual cash flow. This can make the company’s dividend look healthier than it really is.

As investor curiosity about dividends has increased, so has the misconception that income generated from dividends is a perfect substitute for the low interest rates currently being offered by fixed income products.

But dividends from shares are not a straight replacement for fixed income.

• A bond is a contractual lending agreement between you and a company in which you lend a set amount to the company and in return the company will repay you interest at an agreed-upon rate and schedule, and at maturity the company will pay you back the amount you originally lent it.

• With shares on the other hand, there is no maturity date, no contractual obligation to pay interest or return capital, and in the event of bankruptcy ordinary shareholders usually get nothing while creditors tend to get some of their capital back.

Dividends are not guaranteed. If the company runs into hard times and isn’t generating enough cash, it can cut or suspend its dividend. As such, investors keen on moving money from low-interest bonds to higher-yielding shares should be fully aware of the differences between shares and bonds.

Make no mistake – dividend-paying shares, properly vetted and assembled in a portfolio, can be an excellent tool for generating income. The key thing to remember is to not allocate funds to shares for higher yields alone.

Be sure that the funds you’re reallocating to shares will not be needed in the short-term and that you’re comfortable bearing the risks inherent to shares.

Until next time

We’ve covered some basics here, but I think it’s important to start from the beginning and build a good foundation of knowledge. In the next article I’ll continue with this bottom-up approach by explaining what we mean by dividend yield.

Until then, please post your comments, questions, and thoughts below!

You can bookmark all The Analyst’s articles on dividend investing. The archive will be updated as new dividend articles are posted.