Getting Started On Dividend Investing

Most of us have just heard of the term investing in general which basically means that when we want to invest in something, we are believing that it will appreciate in value or worth more than what we bought it for, so that someday we may sell it at a profit. Most people who do this are looking at what we call capital appreciation. It is just like you attempting to buy a million dollar property looking to sell it for $1.2mil in say 5 years later. The $200k additional is capital appreciation.

On the other hand, some property owners may be less particular about capital appreciation but more focused on rental yield that they can collect every other month. These investors are seeking more of yield rather than price appreciation. In the financial markets, we term this as income investing or dividend investing.

Basically the process of dividend investing is very similar to growing your own cherry tomato plant or your own Kangkong if you have applied for the seeds from NParks before! Whenever your plant reaches the harvest stage, you get to enjoy the fruits or the vegetables. Once you harvest the plant, you leave the plant to grow up again before the next harvest. 

If you like that idea of being able to regularly enjoy the ‘fruits of your labour’, you would probably love the idea of dividend investing. In dividend investing, you invest in stocks which have shown the ability to distribute regular dividends, usually in the frequency of 2 times a year or 4 times a year. Dividends can be in the form of cash distributions or distributions of additional shares of the company. 

For the purpose of income investing, we are invested in the Singapore markets – the Singapore REITs in particular. REITs stand for real estate investment trusts. 

Here is a screenshot of the dividends we receive from 1 of the stocks in our REITs portfolio that we do hold, which is CapitaLand Integrated Commercial Trust.

Now that you know more about dividend investing, what should our end goal be? Or put it this way, what objectives are investors looking to achieve when constructing a dividend portfolio? We would generally categorise into 3 different objectives.

The first objective is to retire and live completely on dividends. If you are also thinking of living off dividends, catch our upcoming post as we share how much you would ideally require to be able to achieve that.

The second is that some investors just like the idea of receiving regular cash payouts. While we would generally be able to get a higher investment return from growth stocks over dividend stocks, for some investors, they just value the cash inflows more than the paper gains. This is also one of the main reasons why there are some investors who prefer dividend investing over growth investing. 

Lastly, there is another group of investors who allocate a portion of their funds to do dividend investing and that portion represents the defensive part of their overall investment portfolio. And for us, The Joyful Investors, we belong to this category. Dividend investing in the S-REITs provides us with some kind of reliability and stability in our portfolio, acting like the defenders of the soccer players lineup. If you wish to understand more about our methodology for portfolio construction, check out our blog post here.

The thing is though generally investors invest in dividend yielding stocks for the dividends, it does not necessarily mean that there will be no or little capital appreciation to enjoy. Typically for us, we want to be buying good REITs which give us 4-5% of yield. Anything less than 4% we will not be interested in. In fact we know some investors may be looking at at least 5%. That’s nothing wrong as well. It’s just that occasionally we are cool with 4% because some of the very good REITs may not have so high a yield, which they make up with capital appreciation over the long run. 

Over at TJI, we prefer to look at the broader picture. A slightly lower yield over the long term in return for longer term upside is fine for us. This is because for us, we invest in the dividend stocks not because we need this stream of income to be perpetual in the sense that some retirees would like to. But for us, dividend investing forms the defensive portion of our overall investment portfolio. REITs being cyclical, we may consider to offload them when they are at the top of their cycle and to hold as just cash or to be redeployed to other markets. To us it is more of over time, how much money it would make us in general and being the defensive portion of our portfolio during times when the growth stocks are not pulling their weights. 

With that, hope that our sharing has provided you with more context on understanding dividend investing. Stay tuned as we will be releasing more blog posts on dividend investing soon! (P.S. next up would be on how big a portfolio you need to live completely on dividends)

Do also follow us on our Telegram channel as we post some of our trades on the Singapore REITs from time to time when there are good opportunities.