For those who are starting their first job, retirement may seem like a far-off concept that you need not worry about.
However, you should realise that time is of the essence.
You should start to grow your wealth as soon as you enter the workforce and start earning a salary.
In case you are wondering how you’ll ever save up enough for retirement amid the rising cost of living, know that savings alone won’t be sufficient to help you build your nest egg.
You need to put your money to work by investing it in the stock market – specifically, dividend-paying stocks.
Dividend investing is one of the tried-and-tested methods for not just growing your wealth, but also generating an increasing stream of passive income that can serve you well into your retirement.
Here’s how you can go about harnessing the power of dividend investing.
Build a portfolio of dividend stocks
The first step is to build up a portfolio of dividend stocks.
To do so, you can select from a myriad of stocks in the Singapore market, as dividends are tax-exempt in the hands of the shareholder.
Tax-free dividends are one of the key benefits of dividend investing, unlike property investing, where rental income needs to be added to your earned income for your tax computation.
You can start by looking at blue-chip stocks, as these companies have significant size and scale and possess a solid track record of weathering good times and bad.
All the blue-chip stocks also pay out a dividend, making them suitable additions to an income-focused portfolio.
Some examples include well-known names such as DBS Group (SGX: D05) and Singapore Exchange Limited (SGX: S68), or SGX.
Others include Singtel (SGX: Z74), Keppel Ltd (SGX: BN4) and Singapore Technologies Engineering (SGX: S63), or STE.
DBS, SGX, and STE pay quarterly dividends while Singtel and Keppel dish out dividends every half a year.
Another interesting sector will be REITs, or real estate investment trusts.
Structured as easy-to-invest securities, these bundles of real estate assets generate consistent rental income for investors.
Their requirement to pay out at least 90% of their earnings as distributions makes them ideal for income-seeking investors.
Some examples of better-known REITs include Parkway Life REIT (SGX: C2PU), Frasers Centrepoint Trust (SGX: J69U), and Mapletree Industrial Trust (SGX: ME8U).
Invest regularly and through market cycles
Now that you have shortlisted a bunch of dividend-paying stocks, the next step is to invest regularly in them.
Remember to save a part of what you earn and channel the money into buying dividend stocks regularly.
Stock markets go through periodic bouts of sharp volatility.
This is a normal aspect of any stock market, and you should not be scared off by these fluctuations.
By investing consistently in these stocks through different market cycles, you can slowly build up your stakes in these solid dividend stocks.
Owning more shares also means that you receive a larger dividend as the years pass.
Therein lies the bonus.
Companies can also increase their dividends over the years, providing a much-needed boost to their dividend income.
Harness the amazing power of compounding
Here’s where things get interesting.
When your dividends become large enough, you can channel these dividends into buying more shares of the same companies that paid you these dividends.
By doing so, you can accelerate the pace of your wealth building and also greatly increase your flow of passive income.
This process is known as “compounding” and has been described as the “eighth wonder of the world” by famous scientist Albert Einstein.
Compounding allows you to use both your savings and dividends to generate even more dividends.
As the years go by, compounding becomes even more powerful as the amounts get larger and you have more money to reinvest into dividend stocks.
Get Smart: Retire with a flow of passive income
Retirement should be a fun and relaxing time to catch up with old friends and pursue your hobbies and interests.
By building a solid portfolio of dividend stocks, you will be well on your way to enjoying a comfortable retirement.
Over time, continue to add to your portfolio through savings and bonuses to build up larger stakes in these dividend stocks.
By harnessing the magic of compounding, you can grow your dividend stream into a flow large enough to sustain yourself through your golden years.
When the market is unpredictable, where can you park your money with confidence? Our latest FREE report reveals 5 Singapore dividend-payers built to withstand global storms. Get it now and see what’s still worth holding.
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Disclosure: Royston Yang owns shares of DBS Group, Mapletree Industrial Trust, and Singapore Exchange Limited.