Warren Buffett needs no introduction.
However, not many recognise Buffett’s billionaire business partner, Charlie Munger.
Munger, Vice Chairman of Berkshire Hathaway, is also an avid investor and is known for his “latticework of mental models” concept to thinking, business, and decision-making.
By imbibing information from various disciplines such as business, physics, psychology, etc, we can better solve a problem that may stump someone with just a narrow focus on a single discipline.
A voracious reader himself, Munger recommends that you cultivate curiosity so that you “get a little wiser every day”.
Reading can help you to accumulate more knowledge and become a wiser person than you were yesterday.
Compounding knowledge
The great thing about knowledge is that each additional layer adds up cumulatively.
This knowledge can help to expand your horizons and grant you more insights into the world and how it affects our lives.
By choosing a variety of topics, we also enrich our lives with a wealth of knowledge.
For instance, reading about the separate topics of politics and economics could give you a better understanding of how countries’ economies work and how they influence one another.
This understanding may impact businesses which depend on the health of the economy and in turn, your stock price.
These insights are the result of gleaning knowledge from disparate disciplines that stack up to give you a bigger picture understanding of the world.
This is what is known as the “compounding” effect where each layer of knowledge adds on to the previous and stacks up to provide you with even more insights.
In simple terms, one plus one is not equal to just two, but you end up with more than just the sum of the parts.
Do the same for your wealth
This concept of compounding also applies to wealth-building.
By slowly adding more money to your investment portfolio, you can steadily build up a larger position in the stocks you own.
Dividend-paying stocks do a lot to contribute to this compounding effect.
As dividends are dished out, they help to grow your cash fund.
This fund can then be allocated to the same stocks that paid out these dividends, allowing you to increase your stakes in solid companies for the long term.
Over time, these stocks will see their share prices rise as their business grows.
At the same time, they also up their dividends in line with their rising profits.
Compounding in action
A simple example illustrates this point.
Let’s assume you have two shares: DBS Group (SGX: D05) and Mapletree Industrial Trust (SGX: ME8U).
An investment of 1,000 shares in DBS Group will yield an annual dividend of S$1,920.
Likewise, if you have 10,000 units of Mapletree Industrial Trust, it will supply an annual distribution of S$1,347 based on the REIT’s trailing 12-month distribution per unit of S$0.1347.
Together, these two stocks provide a total annual dividend of S$3,267.
With this cash, you can reinvest back into the industrial REIT by buying another 1,400 units for S$3,066 (each unit costs S$2.19 as of this writing).
After the purchase, you will have 11,400 units.
Assuming Mapletree Industrial Trust keeps its distribution constant, you will receive S$1,536 in dividends in a year.
Add this amount to what DBS pays, and your total dividends will be S$3,456.
This higher level of dividends now enables you to purchase 100 additional shares of DBS Group at S$33.79 per share.
Hence, you will end up with 1,100 shares of DBS Group and 11,400 units of Mapletree Industrial Trust by the end of the second year.
Again, if the duo maintain their dividends, you will get even more cash in the future.
Even better, if DBS Group and Mapletree Industrial Trust raise their dividends, you enjoy a “double bonus” as you have more shares on hand, allowing you to receive an even larger stream of dividend income.
(Get) Smarter and richer
Back to Buffett – did you know that he earned 99% of his wealth past the age of 52? (For context, the man is 93 this year).
The reason he achieved such vast wealth only much later in his life was because compounding is a process that requires time and patience.
As investors, the practice of compounding our wealth is something that all of us can work into our investment strategies. With patience and time, compounding can help to grow our retirement fund into a sizable amount.
The second aspect of learning and understanding more about companies is something that not all of us have the time, or inclination for.
For example, at our flagship service, The Smart Dividend Portfolio, our team of analysts spend not days, but months or even years researching a company before we decide if it is worthy for a place within our portfolio.
We feel that by observing, learning, and understanding more about companies, we get a better idea of how businesses work and what separates the great ones from the mediocre.
We understand that this is not something that every investor is able to do. But that is what we are here for.
We are here to distill our decades of investing experience and knowledge, so that you don’t have to.
One of the ways that we do so is through our most popular service, The Smart Dividend Portfolio. It focuses on finding the best dividend stocks that the Singapore stock market has to offer, and presenting it to our members.
Every month, we put our money where our mouths are and buy stocks to add to our portfolio. We do that to showcase the advantage of compounding and dividend investing.
Not sure where to park your money in 2023? Give dividend stocks a try. You don’t need a lot of capital to start a stream of passive income. Our latest guide will show you how to invest and where to find the juicy dividends in SGX. Click here to download the report for FREE.
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Disclosure: Royston Yang owns shares of DBS Group and Mapletree Industrial Trust.
