Today, let us turn our attention to the magical stream of ‘free’ income that companies pay you just for owning their stocks – Dividends.
When you invest in stocks for their dividends, you’re investing for the cash flow / passive income and ultimately the peace of mind that comes with it. Dividend earnings typically increase along with inflation over time, making them a much more viable source of lifetime income than a savings account earning 2% interest.
For me, dividend investing is a long term game where the ultimate goal is for the dividends to sustain my lifestyle.
Invest and do it for the Long Term
The public is led to believe that investing in the stock market is incredibly difficult, it really isn’t. If you ‘invest’ instead of ‘trade’ and do it for the long term, you’re in an incredibly favorable position to build wealth. People who trade in and out, jumping from one investment to another are simply making their brokers rich.
Concentrating on value. In the words of Warren Buffett “Price is what you pay, but value is what you receive”. It’s no different with stocks. Paying a premium for a quality business will always be better than getting a “bargain” on a stock with a lousy underlying business.
Focusing on quality. Quality is usually backed by a superior product with a brand name that people are usually more than willing to pay a premium for. Take Nestle for example, the next time you make your way down to your grocer, take the time to notice how many of the items in your cart are actually products of Nestle.
Identifying economic moats. An economic moat refers to a business' ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Nestle has a huge economic moat because of their global footprint, large brand name exposure, quality of product and economies of scale through volume and distribution. These aspects of Nestle’s business are extremely attractive and that’s why they are usually priced at a premium over their competitors. Nestle has a majority piece of the market share in almost every market it compete in. With an economic moat, the odds are strong that a company will be able to continue to boost earnings and dividends for many years to come.
Personally, I save up my net income along with the dividends I receive and invest the majority of it into quality dividend stocks every 6 months. This is somewhat a form of cost averaging for me as I do not believe in timing the market. At the current brokerage fees, I’ve worked out the ideal amount to invest to be around RM8,000. Investing this amount every six months is the best bang for my buck and unless a rare opportunity appears, I usually stick to this schedule. I do fully understand that investing RM8K is not ideal for everyone, please do not be put off by this large figure. If RM1,000 is all you can manage in half a year, by all means invest that RM1,000. Not investing is a bigger loss for you than any brokerage fee.
For beginners I would recommend building a core portfolio around stable and high dividend paying stocks such as Real Estate Investment Trust (more info on REITs here) as well as your typical consumer based stocks such as Nestle and F&N. These stocks typically aren’t as hard-hit during economic crises. Don’t expect huge 10 – 20% jumps in stock price from these stocks. Instead, you’ll get a steadily increasing flow of dividends and capital gains.
I did not want to throw figures, ratios, balance sheets, cash flow statements and the like to confuse prospective investors. I wanted this to be a basic guide on dividend investing and I want future investors to always remember the basics. When investing in stocks, you’re owning a piece of a business. When the business does well, you get rewarded with increased dividends as well as a jump in the stock price. Make sure you do the ground work and fully understand what you’re investing in. If you find yourself trading/betting instead of investing, it’s probably a good idea to invest your money elsewhere.
Dividend Magic, a Malaysian blog focused on stock investment and financial independence. This article is written in collaboration with Leigh, a certified financial planner and full time investor. He invests mainly in Malaysian stocks and aims to achieve financial independence by 35 with the help of dividends and compound interest.
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