Let’s now turn our attention towards the magic stream of ‘free income’ that companies pay just for having their stocks: Dividends.
You are not investing in stocks to earn dividends. Instead, you are investing in them for their cash flow/passive income and the peace of mind. Dividends are more reliable than savings accounts earning 2% interest because they increase with inflation.
Dividend investing for me is a long-term game. My ultimate goal is to use the dividends to support my lifestyle.
Invest for the long-term.
Although the public believes that investing in stock markets is difficult, it isn’t. You can build wealth by choosing to ‘invest’ rather than ‘trade’, and doing it long-term. Trades that involve jumping from one investment to the next are a way for brokers to make a lot of money.
Value is the most important thing. Warren Buffett said, “Price is what I pay, but value what I get.” Stocks are no exception. A premium will always be more expensive than a stock that has a poor underlying business.
Focusing on quality. Quality usually comes with a superior product and a brand that consumers are willing to pay more for. Nestle is a good example. Next time you go to the grocery store, notice how many items are Nestle products.
Recognizing economic moats. An economic moat is a business’s ability to retain competitive advantages over its competition in order to protect its long term profits and market share against other firms. Nestle’s global reach, brand exposure, product quality, and economies of scale through volume distribution and volume are all factors that contribute to their economic moat. These are all attractive aspects of Nestle’s business, which is why they are often priced higher than their competition. Nestle holds a large share of almost all markets it competes in. A company with an economic moat has the potential to increase earnings and dividends for many more years.
My net income is saved along with any dividends received. I then invest most of that money in quality dividend stocks each 6 months. As I don’t believe in timing the markets, this is a type of cost averaging. Based on the current brokerage fees, the ideal amount to invest is around RM8,000. This amount should be invested every six months to get the most bang for my buck. Unless there is a rare opportunity, I stick with this schedule. While I fully realize that investing RM8K may not be for everyone, do not let this discourage you. If RM1,000 is more than you can manage in half a calendar year, then invest that RM1,000. You are more likely to lose your money than you are to pay a brokerage fee by not investing.
A core portfolio should be built around stable dividend-paying stocks like Real Estate Investment Trust. (More information on REITs can be found here). These stocks won’t cause huge jumps in stock prices of 10-20%. Instead, expect a steady increase in dividends and capital gains.
I didn’t want to confuse potential investors by presenting figures, ratios and balance sheets or cash flow statements. This guide was meant to provide a simple overview of dividend investing. Future investors should also be familiar with the basics. Stocks are a way to own a part of a company. You get increased dividends and a rise in stock prices when the business is successful. You need to do your research and understand the risks involved in investing. It’s probably a smart idea to invest your money somewhere else if you are trading or betting instead of investing.
Dividend Magic is a Malaysian blog that focuses on stock investing and financial independence. Leigh, a full-time investor and certified financial planner, collaborated on this article. He invests mainly Malaysian stocks, and hopes to attain financial independence by 35 using compound interest and dividends.