Dividends: A Passive Income

Dividends are payment made by a company to its shareholders, usually out of its profits. Dividend policy varies from company to company. For example, some company do not pay dividends regularly. Others, like Singpost, pays dividends every quarter. Hutchison Port Trust pays bi-annually and Straco pays yearly.

People view dividends as an added bonus when they trade stocks. For an investor, dividends may be the make-or-break decision for buying the stock. This is because in the long run, dividends eventually becomes your passive income. One good example is Dividend Warrior, who regularly blogs about his dividend returns and income. In the latest 13 August 2014 post, he had accumulated $10,262 of dividends. These dividends are based on a capital of $222,560. That is my idol right there!

Usually when I tries to preach about the importance of investing for passive income, the usual response is that the capital is too low to start. However, I beg to differ. Everyone must start at some point and when better to start than now? For young investors, the most precious asset you own is TIME! Given that your capital returns an interest of 5% per annum and that you reinvest your interests, $1000 will become $2000 in 14.4 years. Make your money work as early as possible! In addition, SGX will cut lot size from 1000 shares to 100 shares by 19 January 2015. Currently, you can only buy stocks in blocks of 1000 shares, or 1 lot. By next year, you can purchase stocks in blocks of 100 shares. This means that blue chips like DBS or Keppel Corp will be more affordable to the public.

The gains to be made from investments are from either capital gains from rising share price or dividends. Although capital gains are usually gained in a shorter period of time and thus more satisfying, a smart investor will realise that dividends pay well in the long term. Everyone looks forward to retirement eventually and living expenses after retirement generally comes from CPF. But what if you manage to build a sizeable portfolio by the time you retire? Instead of putting your cash into a saving accounts which yields less than 1%, put it into dividend-yielding stocks like REITs and Trusts. These two types of stocks usually yield at least 5% dividend a year. In addition to CPF withdrawal, dividend payment can really add to the comfort of your retirement. For me, investment is really about building a portfolio that can eventually provide enough dividends for financial freedom/retirement. That should also be the objective that other have for investing.

As a result of my love for dividends, I had been slowly buying dividend stocks like Trusts and REITs the past 2 years. Below is my humble dividend records in the last two years of investing:

Do note that Dividend Yield reflects average yield of only dividend-bearing stocks while Portfolio Dividend Yield is the dividend yield based my enlarged portfolio capital.

I've highlighted the benefits of dividends in investing and also briefly covered how time is our most precious asset. Also, I've mentioned about two categories of stocks, REITs and Trusts, which bears comparatively higher dividend yield. Hopefully after this post, you might give investing a good thinking over and start your own investing journey!