Living in Singapore can be an expensive affair.
It’s almost impossible to avoid the upward march in the prices of goods and services year after year.
Salaries, bonuses and wages, however, may not rise in tandem with expenses.
In fact, with the COVID-19 pandemic as a backdrop, the availability of jobs may be reduced and salaries may also be cut.
In short, it’s tough trying to grow our money as economic conditions get increasingly challenging.
To add to the pain, inflation is slowly but surely eating away at our hard-earned cash.
Even as we sock more cash into our bank accounts, banks pay out a pathetic return due to falling global interest rates.
So, how do you prevent the erosion of your wealth and set yourself up for a stream of passive income when you retire?
The answer to that is to build a robust, income-generating portfolio that will last you for a lifetime.
Selecting dividend-paying companies
The first step to building such a portfolio is to select strong companies with a history of paying out regular dividends.
These consistent dividend payers should have a robust business model and a resilient balance sheet.
Ideally, these chosen companies should also remain relatively unscathed by the ongoing pandemic.
Some examples may include VICOM Limited (SGX: WJP) and Singapore Exchange Limited (SGX: S68), or SGX.
VICOM paid out a full-year dividend of S$0.096 for 2019 and sports a trailing 12-month dividend yield of around 4.5%.
Meanwhile, SGX pays out a quarterly dividend of S$0.075 (full-year of S$0.30), which translates to a trailing 12-month dividend yield of about 3.6%.
Both these yields surpass the long-term inflation rate of around 2% to 3%.
Furthermore, you may also get to enjoy rising dividends if the business continues to grow and improve.
These dividends flow automatically to you as a passive source of income that can help supplement your employment income.
The power of compounding
The aim, however, is to continue to grow this income stream, and not let it stay stagnant.
An effective method of doing so is to reinvest the dividends you receive back into buying the same, great companies.
In effect, you will be increasing your stake in these companies steadily, over time.
With a higher number of shares, the dividend that you receive during the company’s next declaration will also be correspondingly higher.
And so, in a virtuous cycle, the continuous process of reinvesting your dividends yields even more dividends.
If the company offers up a scrip dividend option (also known as a dividend paid out in shares rather than cash), this serves as another way for you to reinvest.
Investors that consistently reinvest their dividends will find the value of their investment portfolio growing over time, in the process, creating a strong foundation with which you can rely on for passive income.
This whole process is known as “compounding”, a phenomenon so strong that late Albert Einstein, the world’s eminent scientist, is said to have remarked that “compounding is the eighth wonder of the world”.
Growing your passive income stream
By now, you should already have a clearer picture of how you can go about growing your passive income.
Diversify your holdings in a broad spectrum of companies to gain exposure to growing industries and enduring trends.
Doing so allows multiple streams of income to take root.
Your investment portfolio will be even more well-protected should a crisis hit, as you will not place undue reliance on any single source of passive income.
Over time, these streams of income may also grow larger, rewarding you with even higher levels of passive cash flow.
Do note that this entire process of building, cultivating and growing your portfolio takes years, if not decades.
This process of growing rich is a slow, but ultimately certain one.
It takes patience, conscious effort and discipline to keep to your investment plan.
Compounding will allow your portfolio to achieve a scale you may only dream of now, and also create a robust, consistent flow of dividends that go straight into your bank account.
Get Smart: Enjoy a blissful retirement
The key to building up a reliable stream of passive income is an open secret.
Almost anyone can do it, including yourself.
The principles of sound, prudent investing are not difficult to understand or apply.
It does, however, take considerable patience and a heavy dose of discipline and fortitude.
There is no better time to start building your dividend portfolio than today.
As you plant the seeds of your portfolio today, think about the eventual joy in savouring the fruits of a blissful retirement many years later.
This thought should be the motivation we all seek as we diligently go about deploying our capital.
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Disclaimer: Royston Yang owns shares in VICOM Limited and Singapore Exchange Limited.