There are two main schools of investing – growth investing and dividend investing (income investing).
Growth investors target stocks exhibiting fast growth that can help propel their share price higher over time.
While this strategy can generate eye-watering capital gains, such stocks usually do not pay out a dividend as they are reinvesting their profits for further growth.
Hence, an investor approaching retirement may be forced to sell off a portion of his/her growth stocks for cash flow.
Income investing, on the other hand, emphasizes the flow of dividends and focuses on stocks that can pay out regular and increasing dividends.
Let’s find out how a dividend investment strategy can be a more effective method to prepare you for your retirement.
Invest in solid, dividend-paying stocks
To start in dividend investing, you first need to identify reliable dividend-paying stocks to purchase.
A good place to begin will be the blue-chip stocks.
This category of stocks exhibits robust characteristics such as the ability to withstand different economic cycles.
They usually also have a long track record of paying out dividends.
Some examples of dependable blue-chip stocks include DBS Group (SGX: D05), Singapore’s largest bank by market capitalisation, and Singapore Exchange Limited (SGX: S68), or SGX.
DBS has steadily raised its quarterly dividend since 2022.
The quarterly dividend has increased from S$0.33 per quarter in the first three quarters of 2022 to S$0.54 in DBS’s most recent quarter.
SGX has the advantage of being the sole bourse operator in Singapore, thus giving the business a natural monopoly.
The group paid a quarterly dividend of S$0.085 for its most recent quarter with its annualised dividend coming in at S$0.34.
This level of dividend was higher than the prior fiscal year’s S$0.325.
The REIT sector is another goldmine for dependable, dividend-paying stocks.
A great example is Parkway Life REIT (SGX: C2PU).
The healthcare REIT reported a consistent increase in its core distribution per unit (DPU) since its IPO in 2007.
Another example is Mapletree Industrial Trust (SGX: ME8U) which pays out quarterly dividends.
The industrial REIT reported a DPU of S$0.1343 for its latest fiscal year, down just 1% year on year from the prior year.
Receive a steady flow of passive income
As you slowly build your portfolio, use any spare cash you possess to purchase shares of dividend-paying companies.
Over time, any savings you build up can be slowly deployed to increase your stake in the stocks that you feel comfortable owning.
By doing so, your flow of dividends will increase over time as you increase your stakes in these stocks.
The beauty of dividend investing is that these dividends act as a source of passive income that goes directly into your bank account.
Dividends also represent a tangible return on your investment that is unrelated to the volatile movements of stock prices.
Compounding your dividends
Apart from using your savings to purchase more shares, you can also choose to reinvest your dividends.
This method of reinvestment allows you to compound your dividends and achieve a faster increase in your dividend flow compared to just using your savings alone.
Call it a two-prong approach if you will.
Using your savings and reinvesting your dividends allow you to purchase more shares than you would if you just relied on savings alone.
The bonus is that some stocks, such as DBS Group and SGX, also steadily increase their dividend per share over time.
As the years pass, the dividends you receive will increase both because of a higher dividend per share as well as increased ownership of the stock.
This process is simple in principle but do note that it requires patience to witness its effects.
You also need to be consistent in allocating money to dividend-paying stocks and constantly reinvest the dividends you receive.
As your stakes build up, the dividends you receive will naturally increase.
Get Smart: Turning a drip into a torrent
Because compounding is such a powerful process, it’s recommended that you start as early as you can.
The true power of compounding can only be seen after years or decades have passed.
But if you are patient and consistent with your investments, you shall soon see your dividends go from a drip into a raging torrent.
As you approach your golden years, this larger flow of dividends will help to ease your transition from active income to passive income.
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Disclosure: Royston Yang owns shares of DBS Group, Mapletree Industrial Trust and Singapore Exchange.
