The Power Of Dividend Investing [Part 1]

There have been a number of emails from readers asking me how to calculate or get a decent dividend yield from investing in stocks. I've always subscribed to the idea that creating passive income is important in our lives if we want to achieve financial independence. We could then keep all our earned income and spend on our passive income to be self sufficient.

Investing for income or dividend investing is a good way to create passive income. This method has worked for many people just like how it has worked for me so far. Having extra money coming into our bank account every now and then is not a bad idea at all. I've always had the habit of transferring a portion of my salary to my other bank accounts. I make this process automatic so it is effortless on my part. Then, I can spend the rest of the money left in that one account.

Transferring out my salary but still have more money

I transfer a big part of my salary out from my bank account every month right after my salary comes in. When I do this, magic starts to happen to this account. At first, the money in that bank account seems to be decreasing but as time passes, the money in that account grew even though the automatic transfers were still happening. This was the result of creating passive income.

This was essentially what I did:

You can replace the overseas holiday with any other expenses which you might have. After transferring a big portion of my money out every single month, my account still grew to the point that I could now afford an overseas holiday to Japan, Europe or even the US without saving up.

If you want to enjoy, go create it!
Too many people are just spending all their earned income in order to enjoy life. If we do that consistently, we will be broke all our lives. If you want to enjoy, go create it instead. By creating, I don't mean trying to earn more active income again. It is important to grow our active income and increase it but there will always be a limit on it.

If you can earn more active income but still have the time for other more important things in your life, go ahead and do it. If you take on an additional part time job on top of your full time job, sacrificing away your family time, it doesn't seem like a wise choice. Dividend investing for passive income can help us have more money and at the same time have more time.

The Power of dividend investing
Dividend investing is a powerful concept. Most of us know Warren Buffett as a value investor but he is actually also a dividend investor as well, or we should say a dividend growth investor.

Warren Buffett's top 5 holdings are:

All of the five stocks above pays dividends. Wal-Mart has paid increasing dividends for over 40 years. Coca-Cola has paid increasing dividends for over 50 years. Stocks that increases dividends for the long term is a good choice for a dividend investor. Moreover, a company that can increase dividends may mean its profits increases as well which leads to stock price increasing. Dividend and growth sometimes do go hand in hand.

Singapore Stocks for dividend investing

Some of us are not too familiar with the US market so let's start with the Singapore stock market. Are there companies which has paid increasing dividends over the years?

Yes there is. Let's look at some Singapore stocks and how it will turn out if we had invested in it over the years.

Starhub is one of the 3 telecommunication companies in Singapore. Its no doubt a dividend stock paying dividends to shareholders every quarter. In 2005, Starhub paid a total of 6.5cents in dividend. Fast forward to 2014, Starhub has increased dividends to 20cents for the whole of 2014.

In 2005, Starhub's share price was trading at just $1.30. Today, the price is at $4.05. If we had invested in Starhub back in 2005 and hold it all the way to now, we would be getting a dividend yield of 15.4% (based on a price of $1.30) and also the value of the stock price has increased by 3 times. $5000 invested in 2005 would become about $15000 now and we would still be getting about $800 dividends annually from the initial $5000 invested.

Sembcorp industries is an energy, water and marine group. It has paid dividends every single year for the past 16 years. In year 2000, it paid total dividends of only 10 cents while today, it is paying dividends of 22 cents in 2014. Stock price was trading at around $1.70 in year 2000 and has increased to a high of $5.50 in 2014.

$5000 invested in Sembcorp industries would have grown to $16000 in 2014. We would also be getting an annual dividend yield of 12.9% base on the price of $1.70 bought in year 2000.

The most amazing dividend investing story would be from this company. Jardine C&C is a well know stock among investors especially for its high price of $36 now. At its peak, the price was more than $50. Jardine Cycle & Carriage engages in motor vehicle retail, distribution, and after-sales service.

This company has paid dividends for the past 23 years. In 1993, total dividends paid was 10 cents. Today, in 2014, total dividends paid add up to $1.08 in total. This is more than 10 times increase in its dividend payout. Stock price was trading at $3.80 in year 2000 (I only have the data from 2000 onwards). Today, price is at $36. Dividends has increased 10 times while stock price has increased about 10 times too.

$5000 invested in Jardine C&C would have grown to $50,000 now and we still get about $1300 in dividends annually. This is a 28% dividend yield on the initial invested capital.

Parkwaylife REIT is a real estate investment trust which owns hospitals such as Mount Elizabeth and Gleneagles. It has paid dividends for the past 7 years with dividends at 7.4 cents in 2009 growing to 11.4 cents now. Its stock price was trading at $0.76 in 2009 and $2.31 now.

If we had invested from 2009 till now, we would be getting an annual dividend yield of 15% based on the purchase price of $0.76.

Dividend yield of more than 10%

From the above examples, we would be getting more than 10% or even 20% dividend yield if we had bought and kept those dividend stocks for the long term. However, not all stocks have increasing dividends and increasing stock price. There are many stocks which performed poorly over the years with decreasing dividends or even cutting dividends off completely. Share price would also drop as a result.

The challenge would be to research and find the stocks which have the potential for long term dividend play. In the next part of this post on the power of dividend investing, we'll look into some of the selection criteria which we can possibly use and the strategies to build a dividend portfolio.