5 Reasons Why You Should Kick Start Your Investment Journey With Dividends Investing

Warren Buffet, one of the greatest investors that had lived, often bestowed us many of his quotes on investing. These quotes are short, precise and deliver punchlines.

If I were to pick one, it would be the quote below:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

What is the definition or criteria of a wonderful company? There are different investing methodologies and rationales. Some of the basic ones are dividends investing, value investing and deep value investing.

The ideal, of course, will be a company that has all 3 criteria all matched. But the amount of energy and time to find and wait for such a miracle to happen is akin to finding a needle in a haystack.

It is never easy to find a stock trading below book value, still growing and able to pay shareholders a slice of its profits as dividends.

And of all the 3, I personally think dividend investing is the easiest to kickstart your journey to financial independence. Why? 

1. You get paid in CASH when the company makes money

Some companies are cash printing machines (figuratively). Their business model is so perfect that either they are the only company in a specific industry or their products are so profitable and sales show no sign of stopping down.

These companies will then allocate a portion of their earnings to be paid out to shareholders as a reward for investing into the company.

2. Dividend-paying companies are large and stable

Most dividend paying companies have reached a certain size where it is hard for them to achieve double digit growth. They enjoy a superior business moat with recurring sales and reasonable growth rates. 

Large and stable companies are less volatile in share prices. Meaning you have less chance to see your investments in the red.

3. More compounding power

The greatest physicist Albert Einstein once said that compound interest is the eighth wonder of the world. “He who understands it, earns it; he who doesn’t, pays it,” Albert Einstein reportedly said. By having cold hard cash paid to us, we can choose to reinvest our dividends manually by buying more shares, or some companies like banks offer shareholders to reinvest their dividends by getting more shares.

Below is a table illustrating the power of compounding our reinvestments versus no reinvestments based on 3% dividends per annum and initial capital of RM1000

 

Year  Without Reinvestment With Reinvestment
1 RM1000 + RM30 RM1000 + RM30
2 RM1000 + RM30 RM1030 + RM30
3 RM1000 + RM30 RM1060 + RM33
4 RM1000 + RM30 RM1093 + RM33
5 RM1000 + RM30 RM1126 + RM34
6 RM1000 + RM30 RM1159 + RM35
7 RM1000 + RM30 RM1194 + RM36
8 RM1000 + RM30 RM1230 + RM37
9 RM1000 + RM30 RM1267 + RM38
10 RM1000 + RM30 RM1305 + RM39
TOTAL RETURN RM 300 RM 344

That is 15% more returns compared to not reinvesting and let your investments compound!

 

4. Less patience required

Investing is a patience game. Time is the friend of a wonderful company. A wonderful company will grow big given the time it requires. However the quantum of time required varies case by case for companies in different sectors. 

I always like to compare value growth investing and dividends investing as feeding a chicken for meat and eggs. Value investing is like feeding a small chick, growing it into an adult chicken. Once the chicken reaches its full size, you’ll have to slaughter the chicken to enjoy the meat. To eat a second chicken you have to go through the process of rearing a chick to an adult chicken again, which takes time.

Where else rearing a chicken for eggs, it’s the same process of feeding a small chick, growing it into an adult chicken. But once the chicken reaches adult, it starts to lay eggs. And more and more eggs.

Reinvestment will be incubating the eggs, hatching more small chicks, grooming them to be adult hens, to get more eggs. And it goes on and on and on…

Getting paid the very next year upon investing in a company beats waiting for a company with capital gains, which can be as short as 1 year to as long as 5 – 10 years. That said, it doesn’t mean value investing isn’t great. But at least the annual or quarterly dividends will increase our interests into getting to know more about investing.

 

5. Passive Recurring Income

Usually, dividend-paying companies are so huge and so big, their businesses are usually very stable. You might still need to do your homework and due diligence before investing into such companies, but once your homework is done, you would rarely need to screen through and rethink about the downside risks of the company. 

At most, you are required to monitor the quarterly performance of the company. And check your bank account to ensure the dividends are deposited on time. 

Comparing to a value growth investor, he or she will need to restudy a new company for investing purposes after achieving a one-off spectacular return by selling off their investments.

Perhaps I should also say, time is the best friend for a Dividend Investor. With passive recurring income flowing to your bank account, we could someday be free to pursue our personal interests and enjoy life a bit more?

 

DISCLAIMER
The information available in this article/report/analysis is for sharing and education purposes only. This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned; nor can it be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. If you need specific investment advice, please consult the relevant professional investment advice and/or for study or research only.
No warranty is made with respect to the accuracy, adequacy, reliability, suitability, applicability, or completeness of the information contained. The author disclaims any reward or responsibility for any gains or losses arising from direct and indirect use & application of any contents of the article/report/written material

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