There are many different ways to invest.
Some investors may rely on growth investing to build and grow their investment portfolio.
Others prefer the comfort of receiving a dividend that goes into their bank account, allowing them to spend the money as they wish.
Whichever method you prefer, always remember that your end goal is to ensure you have sufficient funds to enjoy a comfortable retirement.
In this vein, dividend investing offers a great chance for you to not just build a sturdy portfolio, but also enjoy a healthy stream of passive income.
Let’s explore how you can achieve this to enjoy a fuss-free retirement.
Well-managed companies pay dividends
First off, it’s important to remember that strong, well-managed companies can pay out regular dividends.
Many prominent blue-chip companies such as DBS Group (SGX: D05), Singapore Exchange Limited (SGX: S68) and CapitaLand Investment Limited (SGX: 9CI) fall in this category.
Including such businesses in your portfolio means you can rest assured that these businesses should continue to chug along during good times and bad.
By paying out consistent dividends, companies also demonstrate a good track record of producing free cash flow.
Stocks such as VICOM Limited (SGX: WJP) and Boustead Singapore Limited (SGX: F9D) are good examples of businesses that have a long history of free cash flow generation.
Such a track record will serve you well when considering which stocks to include in your retirement portfolio.
Creating a stream of passive income
Retirement is also a time when you’d like to sit back and relax while enjoying a stream of passive cash inflows.
By accumulating dividend-paying stocks, you can steadily build up a growing inflow of cash.
REITs are well-suited for this purpose.
By having to pay out at least 90% of their earnings as distributions, REITs are an effective income vehicle for the dividend investor.
Some examples of REITs that have grown their core dividends without fail since their IPO include Parkway Life REIT (SGX: C2PU) and Mapletree Industrial Trust (SGX: ME8U).
Many REITs are also effective inflation hedges as they offer a distribution yield that’s above the long-term inflation rate of between 2% to 3%.
Logistics-focused Mapletree Logistics Trust (SGX: M44U), for instance, offers a trailing 12-month distribution yield of 4.8% while retail and commercial REIT CapitaLand Integrated Commercial Trust (SGX: C38U) offers a historical distribution yield of 4.9%.
By accumulating such REITs in your portfolio, not only will you comfortably stay ahead of inflation, but your dividends can also grow in line with long-term economic growth.
Reinvesting for growth
The beauty of receiving dividends is that you can reinvest them to gain even more dividends.
You have the freedom of choice to do whatever you please with these cash inflows.
But if you wish to accelerate your journey towards retirement, an effective way is to compound your dividends.
Compounding is the process by which you reinvest the dividends into the very same stocks that paid out those dividends.
Some REITs, such as Cromwell European REIT (SGX: CWBU) and Mapletree Industrial Trust, have introduced a dividend reinvestment plan (DRIP) that allows unitholders to reinvest their distributions at no extra cost.
Alternatively, you can funnel some of the money you receive from dividends back into the companies that paid them out.
By doing so, you will steadily increase your stakes in these stocks, thereby enjoying higher dividends the next time they are declared.
As a bonus, companies may also declare a higher level of dividend per share if they enjoy healthy business growth.
Such an event will further boost the total dividends you receive, paving your way to a happy retirement filled with increasing passive income.
Get Smart: Creating your dividend portfolio
At the Smart Dividend Portfolio, our job is to select a group of dividend-paying companies that can pay us for life.
We feel pleased when we see the cash flowing into our bank accounts, and we are certain that you will feel the same way too if you received these dividends.
So why wait?
You can go on to craft your dividend-paying portfolio with the case studies that we present.
And by doing so, you will be one step closer to your retirement dream.
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Our safe-harbour stocks are a set of blue-chip companies that have been able to hold their own and deliver steady dividends. Growth accelerators stocks are enterprising businesses poised to continue their growth. And finally, the pandemic surprises are the unexpected winners of the pandemic.
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Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange Limited, VICOM Limited, Mapletree Industrial Trust and Boustead Singapore Limited.
