Sadly, news headlines have been carrying harrowing titles relating to salary cuts and retrenchments.
During such tough times, it’s natural to worry about whether you can ever enjoy a stress-free retirement.
With the cost of goods rising every year and a sharp downturn hitting Singapore, prospects for a comfortable retirement look bleak.
Fret not, though, for there is an effective way to build up resilience during downturns.
This method involves investing your money into strong companies to achieve both long-term capital appreciation and a steady stream of dividend income.
Investing is a tried and tested method that can grow your wealth over and above the inflation rate.
Leaving your money in a bank account will cause it to slowly erode as banks are paying very low-interest rates.
There are a variety of different investing methodologies out there, such as growth investing, value investing and income investing.
We feel that income investing, a method that relies on a consistent flow of dividends, can set you on the path to a worry-free retirement.
A constant inflow of cash
The beauty of investing in dividend-paying companies is their ability to continue paying out dividends indefinitely.
This passive flow of income helps to boost your active income, and, if it grows large enough, may even replace it someday.
Take REITs for example.
Many of them are paying out a dividend yield of between 3% to 7%.
If we take an average of around 5%, this means that a S$10,000 investment in them will yield S$500 in dividends every year.
This cash goes into your bank account no matter what you are doing, be it exercising, sleeping or enjoying a relaxing day at the beach.
The power of a passive source of income is that you do not need to devote time and effort to generate it.
By consistently adding more capital into income-generating investments, you can slowly build up your flow of passive income.
You can start with a mere trickle, but as time goes by, it can become a big gush of cash.
The idea is to be both patient and consistent in increasing your stake in great dividend-paying companies.
Less monitoring
Another benefit of investing in solid dividend-paying companies is that they need less time to monitor.
Such companies usually come with strong franchises and competitive moats.
With their dominance comes stability of dividend flow, resulting in less time needed to closely monitor the business itself.
This is in contrast to smaller, speculative companies that may be growing quickly, but could also fizzle out and bomb spectacularly.
Large, stable dividend stalwarts can be counted on to deliver a steady stream of dividends without the need to constantly check on them.
The compounding effect
The final piece of the retirement jigsaw is to reinvest your dividends to generate even more dividends.
This is a process known as “compounding” and can greatly increase your dividend flow as the years pass.
A hypothetical example would be an investment of S$100,000 into a company giving a 10% dividend yield.
After the first year, you will receive S$10,000 of dividends, a tidy sum indeed for your efforts.
You then reinvest these dividends and add them to your initial capital, for a total investment amount of S$110,000 (i.e. S$100,000 + S$10,000).
The following year, the 10% dividend yield should generate a dividend income of S$11,000 or S$1,000 more than the previous year.
If this process is repeated over many years, it becomes a virtuous cycle that will increase your investment base as well as elevating your dividend inflow.
Well-run companies with great growth prospects have been known to increase their dividend payments over the years.
It would be a bonus for your investment portfolio if the dividend per share amount rises every year, as it would be computed on a larger base of investment dollars.
Herein lies the power of compounding.
With regular cash injections, along with reinvestment of dividends, your investment portfolio can grow at an impressive clip.
Get Smart: Sail calmly towards retirement
Although the seas may be stormy now, by following the above investment process, you can sail calmly towards retirement.
It will not be an easy journey though.
But with patience and fortitude, you can eventually achieve a worry-free retirement through consistent dividend investing.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
