There are little things which can bring joy to your life.
It could be having a nice meal with your loved ones or good friends, discovering a new place or experience, or perhaps acquiring a new skill or reaching a personal milestone.
As an investor, one of my greatest satisfaction comes from receiving dividends straight into my bank account.
Yes, this is money that goes into your bank where you can choose to spend however you like.
There’s good news for those of you who are wondering how you can achieve this.
Just stride into the stock market and scoop up several dividend-paying stocks.
Sounds simple? But here’s the catch.
Rather than just accumulating dividend-paying stocks, you should go one step further and target companies that are increasing their dividends.
Why should you do this? Let me explain.
The attractiveness of dividends
Why are dividends so attractive?
Doesn’t it make sense to target capital gains, instead?
Let me explain.
In my view, dividends are one of the only “sure things” in investing – it’s a tangible return going straight into your pocket.
Simply said, dividends cannot be taken away from you.
Contrast dividends with capital gains which depend on volatile share prices that can be influenced by all manner of factors such as the economy and investor sentiment.
That’s not all.
Dividends received from Singapore stocks are not taxed.
This flow of dividend income is also a form of passive income – the money goes into your bank account even as you sleep.
How do you get started?
Well, many investors start with a base of dividend-payers by buying blue-chip stocks such as OCBC (SGX: O39) and Keppel Ltd (SGX: BN4) that payout consistent dividends.
But rather than be content with stocks that dish out dividends, it’s also important to look for those that can increase them over time.
Dividend growers
Stocks which increase their dividends over time are known as “dividend growers”.
By increasing their dividends, these companies can help you to offset the effects of inflation.
To give a simple example, consider a stock that pays a dividend of S$1.00 per share.
If you own 1,000 shares of this stock, you will receive an annual dividend of S$1,000.
If the business continues to pay the same dividend for the next 10 years, the S$1,000 you receive at the end of the tenth year will be worth much less because of inflation.
But if the business increases its dividend by 5% per year, the payout gradually increases and you will end up with a dividend per share of S$1.63 after 10 years, netting you an annual dividend of S$1,630.
Notably, the 5% per annum increase helps you beat the current core inflation rate of 2.5% comfortably.
With this in mind, you should cast your net wider to not just look for stocks that pay out dividends, but to drill down to those that have increased them over time.
DBS Group (SGX: D05) is a great example.
Singapore’s largest bank recently declared a quarterly dividend of S$0.54 on the back of a sterling set of earnings for the second quarter of 2024.
This dividend is an impressive 63.6% higher than the S$0.33 paid out just two years ago.
Singapore Exchange Limited (SGX: S68), or SGX, is another example.
The bourse operator paid S$0.28 in annual dividends back in fiscal 2017 (FY2017).
This annual dividend was increased to S$0.30 in FY2018, S$0.32 in FY2021, and S$0.345 in FY2024.
Meanwhile, the REIT sector also offers enticing opportunities.
Parkway Life REIT (SGX: C2PU) has an enviable track record of consecutive increases in its core distribution per unit since it went public in 2007.
Incidentally, the Smart Dividend Portfolio deliberately targeted the REIT sector earlier this year, putting S$10,000 to work.
The move has proven to be timely.
For the year to date, there are a number of REITs which have posted double-digit gains from their lows earlier this year. And that’s excluding the distributions they pay.
The above is just a sample of dividend growers that are willing and able to increase their payouts steadily.
The idea is to scour the investment landscape to single out more of such dividend growers that you can add to your income portfolio.
A retirement portfolio of dividend growers
With these candidates in mind, you can start to build your retirement portfolio that comprises dependable dividend growers.
To accelerate your dividend growth, you can choose to reinvest these dividends into the same companies that paid them out.
This compounding process can help you to achieve financial freedom sooner as your dividends multiply.
By focusing on dividend growth, you can not only offset the effects of inflation but also enjoy a steady flow of income that can help you achieve your long-term financial goals.
We, at The Smart Investor, are here to journey with you and help you achieve your long-term financial goals, whatever they may be.
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Disclosure: Royston Yang owns shares of DBS Group and Singapore Exchange Limited.
