The Power Of Dividend Investing [Part 1]

There have been a number of emails from readers asking me how to calculate or get a decent dividend yield from investing in stocks. I've always subscribed to the idea that creating passive income is important in our lives if we want to achieve financial independence. We could then keep all our earned income and spend on our passive income to be self sufficient.

Investing for income or dividend investing is a good way to create passive income. This method has worked for many people just like how it has worked for me so far. Having extra money coming into our bank account every now and then is not a bad idea at all. I've always had the habit of transferring a portion of my salary to my other bank accounts. I make this process automatic so it is effortless on my part. Then, I can spend the rest of the money left in that one account.


Transferring out my salary but still have more money

I transfer a big part of my salary out from my bank account every month right after my salary comes in. When I do this, magic starts to happen to this account. At first, the money in that bank account seems to be decreasing but as time passes, the money in that account grew even though the automatic transfers were still happening. This was the result of creating passive income.

This was essentially what I did:

You can replace the overseas holiday with any other expenses which you might have. After transferring a big portion of my money out every single month, my account still grew to the point that I could now afford an overseas holiday to Japan, Europe or even the US without saving up.


If you want to enjoy,  go create it!

Too many people are just spending all their earned income in order to enjoy life. If we do that consistently, we will be broke all our lives. If you want to enjoy, go create it instead. By creating, I don't mean trying to earn more active income again. It is important to grow our active income and increase it but there will always be a limit on it.

If you can earn more active income but still have the time for other more important things in your life, go ahead and do it. If you take on an additional part time job on top of your full time job, sacrificing away your family time, it doesn't seem like a wise choice. Dividend investing for passive income can help us have more money and at the same time have more time.


The Power of dividend investing 

Dividend investing is a powerful concept. Most of us know Warren Buffett as a value investor but he is actually also a dividend investor as well, or we should say a dividend growth investor.

Warren Buffett's top 5 holdings are:

• Wells Fargo
• Coca-Cola
• American Express
• IBM
• Wal-Mart

All of the five stocks above pays dividends. Wal-Mart has paid increasing dividends for over 40 years. Coca-Cola has paid increasing dividends for over 50 years. Stocks that increases dividends for the long term is a good choice for a dividend investor. Moreover, a company that can increase dividends may mean its profits increases as well which leads to stock price increasing. Dividend and growth sometimes do go hand in hand. 

Singapore Stocks for dividend investing

Some of us are not too familiar with the US market so let's start with the Singapore stock market. Are there companies which has paid increasing dividends over the years?

Yes there is. Let's look at some Singapore stocks and how it will turn out if we had invested in it over the years.

Starhub

Starhub is one of the 3 telecommunication companies in Singapore. Its no doubt a dividend stock paying dividends to shareholders every quarter. In 2005, Starhub paid a total of 6.5cents in dividend. Fast forward to 2014, Starhub has increased dividends to 20cents for the whole of 2014. 

In 2005, Starhub's share price was trading at just $1.30. Today, the price is at $4.05.  If we had invested in Starhub back in 2005 and hold it all the way to now, we would be getting a dividend yield of 15.4% (based on a price of $1.30) and also the value of the stock price has increased by 3 times. $5000 invested in 2005 would become about $15000 now and we would still be getting about $800 dividends annually from the initial $5000 invested.  

Sembcorp Industries

Sembcorp industries is an energy, water and marine group. It has paid dividends every single year for the past 16 years. In year 2000, it paid total dividends of only 10 cents while today, it is paying dividends of 22 cents in 2014. Stock price was trading at around $1.70 in year 2000 and has increased to a high of $5.50 in 2014. 

$5000 invested in Sembcorp industries would have grown to $16000 in 2014. We would also be getting an annual dividend yield of 12.9% base on the price of $1.70 bought in year 2000. 

Jardine C&C

The most amazing dividend investing story would be from this company. Jardine C&C is a well know stock among investors especially for its high price of $36 now. At its peak, the price was more than $50. Jardine Cycle & Carriage engages in motor vehicle retail, distribution, and after-sales service.

This company has paid dividends for the past 23 years. In 1993, total dividends paid was 10 cents. Today, in 2014, total dividends paid add up to $1.08 in total. This is more than 10 times increase in its dividend payout. Stock price was trading at $3.80 in year 2000 (I only have the data from 2000 onwards). Today, price is at $36. Dividends has increased 10 times while stock price has increased about 10 times too. 

$5000 invested in Jardine C&C would have grown to $50,000 now and we still get about $1300 in dividends annually. This is a 28% dividend yield on the initial invested capital. 

Parkwaylife REIT

Parkwaylife REIT is a real estate investment trust which owns hospitals such as Mount Elizabeth and Gleneagles. It has paid dividends for the past 7 years with dividends at 7.4 cents in 2009 growing to 11.4 cents now.  Its stock price was trading at $0.76 in 2009 and $2.31 now. 

If we had invested from 2009 till now, we would be getting an annual dividend yield of 15% based on the purchase price of $0.76. 

Dividend yield of more than 10%

From the above examples, we would be getting more than 10% or even 20% dividend yield if we had bought and kept those dividend stocks for the long term. However, not all stocks have increasing dividends and increasing stock price. There are many stocks which performed poorly over the years with decreasing dividends or even cutting dividends off completely. Share price would also drop as a result. 

The challenge would be to research and find the stocks which have the potential for long term dividend play. In the next part of this post on the power of dividend investing, we'll look into some of the selection criteria which we can possibly use and the strategies to build a dividend portfolio.

Read Part 2 here: http://sgyounginvestment.blogspot.sg/2015/07/the-power-of-dividend-investing-part-2.html

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Related Posts:
1. How to pick stocks (Part 1) - Economic Moats
2. How to pick stocks (Part 2) - The profitability of a business

Never Rely On CPF For Your Retirement?

In my previous post on "You Can Never Retire If You Only Save 10% Of Your Income", I said if we only save 10% of our income, it is impossible to retire. There was a comment in that post saying that since we can't retire on 10% savings, then maybe we can retire on our CPF savings which we contribute 37% of our salary on a monthly basis.

In case you didn't realise, yes we contribute 37% of our monthly salary to our CPF. This is quite a high savings rate to speak of. 20% is contributed by us and 17% is contributed by our employer. It goes into 3 separate accounts mainly the ordinary, special and medisave account.


Most of us use CPF to pay for housing loans and medical insurance

However, as we all know, most of us will use our CPF money to pay for our housing loans and also medical insurance. In most cases, young people now and in the near future will need to pay about $1200 per month for their housing loans base on a $300,000 price HDB flat. If we divide equally between husband and wife, each will need to pay about $600 for their housing loan. For a fresh graduate who earns $3000, $600 is almost all that he contributes to his ordinary account. Assuming if salary remains constant, this person would have close to nothing in his ordinary account when he reach 55.

It is a good idea to rely on CPF for your retirement? If we think that we don't need to have our own personal savings because there is CPF, will we be in big trouble?


How much CPF will we have after using it for housing?

Let's demystify how much CPF will we have after using it for housing. Many people say that the future generation of young people will have no money left in their CPF after paying for the high housing loans. Is this true?

I've done the calculation and here is the scenario and the result:

• Starts with $2500 salary and assuming it increases 3% per year 
• Buys $300,000 HDB flat ($275,000 after grant)
• Pays $556/month for housing loan from CPF OA (Divide by 2 with spouse)

From the above scenario, this person will have $580,978 in total from all 3 CPF accounts even after finishing paying for his or her housing loan. Doesn't sound too bad after all. 

From a chart perspective, here's how the CPF money will grow:

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

How much would we have if we did not use our CPF monies at all?

On the other hand, if we did not use our CPF money at all to pay for housing loans, how much would we have?

The number is......  $852,515

This is $271,537 more than the previous example of using CPF for housing. If you notice, the amount paid for the housing loan is only $166,800 per person ($556 x 12 months x 25 years). But, if the money is left inside CPF, there is about $100,000 more due to the interest compounded in the CPF accounts.

Here is the chart for the scenario of not using CPF money at all:

Look closely at the chart again. After age 55 to 65, the person who doesn't use his CPF money at all is a millionaire at age 65. In fact, he has more than a million dollars at $1,152,048. Just by a starting salary of $2500 and growing at 3% per annum, a person can become a millionaire by age 65 if he choose to leave his money in his CPF account.

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

Should we use or keep our CPF money?

Using your CPF to pay for your housing loans or keeping your CPF money inside to earn higher interest is a decision we all have to make. What I have done is simply to show you the difference between using and not using your CPF money. The example above is never perfect with various assumptions. Some may say a starting salary of $2500 is not realistic and a consistent 3% salary increment doesn't sound realistic too. What if we lose our job along the way? Yes, these are all valid concern but the model above is just to give you a rough guide base on the assumptions.

There are also instances where we will earn higher salaries which is even better for us. I have done the calculations before that if we save $1500 per month and invest it at 5% ROI, we will achieve a million dollars in 28 years. CPF gives us interest of about 2.5%-5% for us who are below 55. It is possible to accumulate a substantial amount of wealth through the CPF system alone. Never rely on CPF for your retirement? It really depends on how you use it. Most of us will not be able to rely on CPF for retirement if we choose to empty it early in our lives.

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Related Posts:
1. Changes to the CPF - CPF Focus Group Discussion
2. The affordability of housing in Singapore and the various housing grants available

Become a Savvier Online Shopper: 5 Tricks and Tips to Note!

It’s time to face up to the facts - online shopping is in. With retail therapy conveniently moving online, physical shopping might very well be on its way to becoming obsolete. Of course, that shouldn’t be a cause for concern - any online shopper will know the satisfaction of placing an order online, and having it doubled when receiving the precious parcel a few days later. And there’s no need to have it all at the expense of your wallet - here are five insider tips to help you turn your online shopping trials into triumphs.

1. Filters

If you haven’t been using filters when you browse online, you’ve been doing online shopping the wrong way. Sort your online goodies from Price Low to High to root out the best deals on the site, and keep everything organized for your browsing ease.


For those frustrated at having to sift through pages of irrelevant but cheap items, that’s exactly where the price range toggles come in. Simply adjust your minimum price to something reasonable of the category and you’ll be good to go. Then again, for those who like challenges, feel free to keep the minimum price at $0 – after all, you never know when an extra value deal sneaks its way into the game.

Price filters aside, you can also play with the various filter options provided to you by the website - in clothing sections alone, filters like size, length of skirts, colours, brands and more can really help to narrow down your options so you can access exactly what you want, instantly and efficiently.

2. Sign up for the newsletter

Believe it or not, the online newsletter exists for a purpose larger than flooding your inbox with useless spam. Signing up for the store newsletter gives you advance notice on sales and updates that could do wonders for your savings account.

In exchange for your elusive email, stores tend to reward customer's loyalty with sneak-peek ‘first looks’ at upcoming sales, and sometimes even the handy coupon code. When that happens, you definitely don’t want to miss it out. For many online stores, if you go the extra mile to sign up for an account, you’ll often be gifted with a special discount code on your birthday.

It’s a worthwhile trade for your inbox space, but if you’re still a little hesitant, here’s a tip –create a separate account purely for online shopping accounts and updates. That way, if you’re ever in the mood to part with your money, you’ll find a whole host of avenues waiting neatly for you in one place.

3. Cash in (or out) on holidays

Public holidays aren’t just good for a free day off from work or school now – online stores have cashed in on the holiday hype (and the fact that people are happier on a break) to entice customers with special promo codes and sales. Take a look around: Zalora, ASOS, Lazada, Groupon are just some of the big names that have taken to offering holiday-specific discounts when the occasion arises. Take your pick from Mother’s Day, Father’s Day, Labour Day, and the many other extraneous holidays that bring with them an onslaught of much appreciated discount codes. So if you’ve got your eyes on something, it might help to keep the other eye out for any upcoming public holidays before you place that order. 

4. Resist – curb the urge!

Strangely enough, playing hard to get with your favourite online store works, especially when you’re usually a loyal purchasing customer of the website. From a tried-and-tested perspective, if you refrain from ordering from ASOS for a substantial period of time – whether intentionally or not – this British retailer will very graciously send you a “We miss you, take 20% off!” promo code, exclusive only to you.

Singapore’s Zalora too, has been known to show the occasional act of generosity if you leave something simmering in your cart for a few days. For anyone intending to make a hasty purchase at full price, it might be worthwhile to consider playing the waiting game, because indeed, good things come to those who wait. 

5. Use CashBack Websites!

It’s a little novel to us here in Singapore, but getting money back when you shop has been a popular trend for quite a while now. Most famously done in the US, shoppers can get cashback from purchasing their favourite brands through the particular cashback website. It’s a nifty notion that has thankfully made its way onto our shores  – the cashback sites get their commission, and you get a portion of the money you spent credited back to you.

One such website that offers cashback to the South East Asian consumers is ShopBack Singapore – in addition to cashback on over 500 shops, you’ll get access to current active promo codes and discount codes for those stores including ASOS, Zalora, Groupon, Expedia, Agoda.com, and hundreds more. Once you’ve accumulated at least $10 of cashback in your ShopBack account, you can conveniently cash it out into your bank and PayPal accounts helping you save more online. 

At the end of the day, getting the most out of your online shopping experience comes down to shopping smart. Understanding and knowing how best to work the ways of the websites will help any avid shopper get a good deal - possibly even more than in shopping real-world retail. And honestly, who needs instant gratification when you can have the delayed pleasure of receiving a parcel addressed to yourself, from yourself?  

Amanda writes for cash back website ShopBack Singapore and has 48 pairs of shoes. Other than that, she's pretty good at handling her finances.

This post is brought to you by Shopback. Sign up and start enjoying cashback for your online purchases today!