Why dividends matter Buy low, sell high is the most commonly heard philosophy in investing. Of course, it is the most obvious way to make money. But to be honest, how many can really time the market accurately every time?
How many can predict the share price accurately by buying at the lowest and selling at the highest consistently?
There are so many investors who thought that the stock they bought was at the lowest price but it went down even lower.
Well, there is no doubt that buying low and selling high will make you money but it is not the only way; you can make money from dividends as well.
In the previous issue, we discussed the five simple steps before you invest in dividend companies. Now, we will share with you the power of dividends.
How do you take advantage of dividends?
The company you own pays you dividends for being patient. In other words, dividends allow you to generate cash flow even without the need to sell the stock.
However, to make superior profits through dividends, you have to understand compounding.
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” – Albert Einstein
That’s the power of compounding.
When you receive dividends, you have the option to either spend them or reinvest them. If you choose to reinvest the dividends, you will then have more stocks which in turn pay you more dividends.
By consistently reinvesting these dividends, you will then experience the compounding effect on your net worth.But this is easier said than done. It takes time to achieve and requires tremendous patience.
That is why most investors are unable to generate profits consistently because they sell too early to have compounding on their side.
Dividends can help you eliminate risks
To demonstrate this, let’s quickly examine a well-known local company called Hup Seng Industries. It has a simple business model in manufacturing and selling biscuits, beverages and confectionery in Malaysia.
Imagine you invested in Hup Seng 10 years ago, in December 2008, at about 14 sen a share and you have held it until today. The shows the dividends you would have enjoyed every year.
Just by collecting dividends alone, you would have received a total of 38.1 sen for every share.
Meaning, by investing RM140,000 10 years ago, you would now have got back RM381,000 of dividends, passive income! Your return on investment (ROI) on dividend alone will be 272%.
And how does dividend eliminate risks? Remember that the maximum risk an investor is facing is the capital put into the stock.
If you have invested RM140,000 and gotten RM381,000 in dividends, what is your risk now?
None because you have collected all your capital back from the dividends.
Dividends set you free
Today, many among us are looking for a way to be financially free. We start a business, start direct selling or even do odd jobs just to increase our income.
However, what many do not pay attention to is that dividends are the easiest and purest way for anyone to attain financial freedom and build their stream of passive income.
All you need to do is buy some shares of dividend companies and the passive income starts immediately with no additional work.
But some would lament that the amount is not enough. If you had bought Hup Seng at 14 sen a share back then in 2008, you would only be getting 0.06 sen in dividends for the entire year or a 4.3% dividend yield on your investment.
Let’s be honest; a 4.3% yield is not excellent, because you will get about 4% by putting your money in fixed deposit. But, this is only the beginning.
Is it possible for a company to prosper over the years and reward shareholders better? Definitely!
If you have held on to Hup Seng from that time until today, instead of getting 0.06 sen in dividends, you would be getting 4 sen in dividends for the entire year.
Compared with your initial investment of 14 sen, that is a 43% dividend yield per year! Meaning, if you had invested RM140,000 10 years ago, right now you will be receiving a passive income of RM60,000 every year.
Great companies will pay you more dividend over time when they make more profits. Your only job is to invest in these companies and do nothing.
You do not need to actively monitor the share price. Patience is a virtue, precisely, in investing.
What if you have even reinvested those dividends you have collected? And the best part – these dividends are tax-free!
Conclusion
Still, most investors lose money in the stock market. The biggest reason lies in their emotional stability.
Remember, the skillset to identify and invest in great companies is only a small piece of the puzzle. The biggest piece lies in your own emotional stability.
Investing is not a destination but a journey. To generate massive wealth is to invest in great companies and most importantly, to have the patience, giving time for them to grow.
Now, imagine you own a cow, a cow that will generate you passive in
Just keyed in my sell order for AirAsia. Wanting to reduce my exposure to AA to take profit. Hoping to match my sell order. Come Wei Wong, buy my sell order lol. Huat Huat
Betkaukau, nothing for us to go gila-gila when aa hits rm4. You are the one who would get extremely gila and might have to go to Tanjung Rambutan if AA doesn't hit that price huhuhuhu
Jaya, nothing about my arse. what'S WRONG WITH TAKING PROFIT ? I was reply Betkaykau, he said who ever holds AA would become gila when it hits RM , hence I replied to him la Jaya
We need a healthy pullback soon. Ya, good that you are buying more if it goes down. was just wondering why you had to attack me when I was stating facts to Betkaukau
In the world of investing you got to be sharp. No one helps each other in reality. You got to learn to make the right decisions at the right time rationally. The investment markets is akin to a market that sells meat. The fight is between the bulls and the bears but anything in between like pigs and cats would be slaughtered by the astute traders / investors
Yup dividend payout date by the secretary supposed to be today Nestor. Usually it happens around 4pm, if not, the next working day depends on delays on the banks.
@newinvestor, this kind of speech does not indicated in any books. No wonder you are capable to survive in such harsh market. Ok back to work, have a nice day . Thank you.
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
Bobii
358 posts
Posted by Bobii > 2018-12-27 23:08 | Report Abuse
once break 3 confirm fly high