The most acute truths appear when you least expect them.
One day, I found myself in the same lift as two trolley-trotting aunties headed for the nearby wet market.
With a sigh, one aunty shared a simple observation with the other:
“S$50 used to last me a week. Now, it’s gone in three to four days.”
Her words were profound in their simplicity.
In a few words, the lamenting aunty summarised the impact of the time value of money that we all feel in our daily lives.
Simply said, our money today is worth less than the money we had yesterday.
The tyranny of rising prices
Like the aunties, you may be feeling the pinch of rising prices.
Your lunch at the local hawker centre is not as cheap as before. If you drive a car, you may feel the pain of higher petrol prices. Or maybe you have seen your mortgage payments go up.
Singapore, like most countries, is facing inflation — the general increase in prices over time.
The problem is that there is no guarantee that prices will go back down.
If you work for a salary, your income may not keep up with inflation.
That is why you need an extra source of passive income — and dividend stocks provide a timely solution.
Dividends: Additional cash in your pocket
Dividend shares are shares of businesses that pay out a portion of their profits to their shareholders on a regular basis.
They offer many benefits for investors, such as:
1. You can start with a small amount of money.
You don’t need to save up thousands of dollars to buy dividend stocks.
In Singapore, you can buy as little as 100 shares of a company and start earning dividends.
For instance, 100 shares of Sheng Siong (SGX: OV8) would only set you back by S$155 (you can buy more, of course).
2. You can create a reliable stream of passive income.
If you select the right set of stocks, dividends are paid out regardless of the market conditions.
You can receive a steady income from your investments without having to sell your shares or monitor the stock prices.
Going back to Sheng Siong as an example: when Singapore recorded its worst recession in 2020, the popular supermarket chain paid out 83% more in dividends for the fiscal year compared to the year before.
Given the circumstances back then, having more cash in your hands is more than welcome.
3. You can invest in dividend stocks without complicated calculations.
You don’t need to do complex analysis or research to find good dividend stocks.
At The Smart Investor, we understand that not everyone has the time or expertise to sift through financial statements and market data. That’s where we come in to make your investment journey hassle-free.
Our team of experienced analysts has already done the hard work for you. We meticulously research, vet, and select the most promising dividend stocks.
Keeping it as simple as possible
Many people are understandably afraid of losing money in the stock market.
But in reality, it is possible to greatly reduce this risk by focusing on the right kind of stocks.
You see, the dividends you want don’t appear out of thin air.
When you are a shareholder in a company, it means you own a piece of that company. When the company makes money, like selling products or services, they collect a bunch of money as profits. Now, sometimes, the company wants to give some of that money back to you because you’re an owner.
As an investor, the aim is to identify companies that firstly, make profits, and secondly, companies who are willing to give some of that profits back to you.
Staying focused is more important than ever. Especially when there are so many distractions in the stock market today.
If you start with an end in mind, what income investors want are dividends. Dividends, in turn, can only be paid when there is cash.
But that’s not enough.
To keep on receiving dividends in the future, you need a continuous flow of cash to keep up.
That’s why you need a steady business which generates this cash which, in turn, is paid out as a dividend.
Above all, you need sustainability across the three elements of business, cash, and dividends.
Get Smart: Hard truths to keep going
Here’s the hard truth.
As you know, there are not many things in this world which are certain.
However, there is a good chance that inflation is here to stay. It’s just a matter of how much inflation occurs each year.
Meanwhile, relying on a salary as the single source of income may not be enough to defray the relentless increase in prices.
As a shareholder, when a company in your portfolio makes money, they share a portion of it with their shareholders through regular dividend payments. These payments can provide you with a steady stream of passive income. It’s like having a mini payday from your investments.
The beauty of dividend stocks is that they can grow over time. Companies often increase their dividends as they become more profitable. This means your stream of passive income can potentially get bigger year after year, helping you stay ahead of inflation.
While the future may hold uncertainties, one thing’s for sure: investing in dividend stocks can be a powerful tool in your financial arsenal.
Disclosure: Joanna Sng owns shares of Sheng Siong.