You may have heard stories of people who got wealthy through investing.
Share investing is one of the best methods for steadily growing your pot of gold to better prepare yourself for retirement.
The investment process is not as tough as it sounds and can be achieved with diligence and patience.
The key is to allow your money to compound over time through an easy, four-step process.
By rinsing and repeating this process over years and even decades, you can ensure that your portfolio can churn out a steady and growing stream of passive income.
So, what are we waiting for? Let’s take a closer look at each of these steps.
Step 1: Screen for dividend-paying stocks
The first and most important step is to screen for dividend-paying stocks that can form the bedrock of your investment portfolio.
But why dividend stocks, you may ask?
The ability to pay consistent dividends implies that the business is generating healthy free cash flows and that management is willing to share some of the profits with shareholders.
A business that can dish out dividends should also have a strong balance sheet and a sturdy business model.
These attributes can be found in most blue-chip stocks as such companies boast a long track record and a strong business model.
Some examples of solid blue-chip names include the local banks DBS Group (SGX: D05) and OCBC (SGX: O39) as well as bourse operator Singapore Exchange Limited (SGX: S68).
The REIT sector is another fertile ground for finding dividend payers.
REITs are mandated to pay out at least 90% of their earnings as distributions to enjoy tax benefits.
This requirement makes REITs a perfect choice for regular dividends.
Blue-chip REITs include those from the Mapletree family such as Mapletree Industrial Trust (SGX: ME8U) and Mapletree Logistics Trust (SGX: M44U).
They also include stalwarts such as CapitaLand Ascendas REIT (SGX: A17U) and CapitaLand Integrated Commercial Trust (SGX: C38U).
Once you have screened through the dividend stocks you prefer, you can then include them in your buy watchlist.
Step 2: Build up a diversified portfolio of stocks
The next step involves the execution of your investment plan.
You should deploy your funds to buy a diversified portfolio of dividend-paying stocks.
These could include the blue chips previously mentioned along with several resilient REITs.
The idea is to ensure you obtain a good mix of stocks that cover a range of different sectors such as banks, consumer goods and real estate.
By doing so, you also spread out your risks in case any one sector performs badly.
Step 3: Sit back and receive dividends
Next, sit back and wait for the dividends to flow into your bank account.
The beauty of dividend investing is that the income is passive and does not require you to put in further effort to obtain it.
You do, however, need to keep an eye on the health of the business to make sure that it can continue to pay these dividends.
This is where the “diligence” part comes in.
Several stocks such as DBS Group and Mapletree Logistics Trust pay quarterly dividends while most others such as Sheng Siong (SGX: OV8) pay dividends half-yearly.
Step 4: Reinvest the dividends you received
The final piece of the puzzle involves the reinvestment of the dividends you receive.
Receiving a dividend is only the first step of the compounding process.
Rather than spending this dividend, you can choose to reinvest it to buy more shares of the very same companies that paid you the dividend.
For instance, if Mapletree Industrial Trust pays you a dividend of S$500, you can choose to purchase around 200 shares of the industrial REIT to increase your stake.
The next time the REIT pays out its quarterly dividend, you can then enjoy a higher dividend amount because you now own more shares.
If Mapletree Industrial Trust should steadily increase its dividend along the way, it will be a double bonus for you if you reinvest your dividends.
By rinsing and repeating this process for all the stocks you own, you can slowly but surely increase your stakes in them and see your dividend stream grow larger over time.
Compounding is a culmination of the different steps outlined above and with patience, you can grow your portfolio’s value over the years and end up with a nice retirement pot of money.
Get Smart: It’s easier than you think
Building a robust portfolio with dividend stocks isn’t hard.
All it takes is for you to start by investing your first paycheck or some savings into a diversified portfolio of well-managed stocks.
As these stocks pay out dividends, you can then reinvest these dividends to compound your wealth.
Over time, you will end up enjoying a steady gush of dividends and see your portfolio value grow to an impressive amount.
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Disclosure: Royston Yang owns shares of DBS Group, Mapletree Industrial Trust and Singapore Exchange Limited.
