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Sound approach to investing for income?

Monday, May 7, 2018

Reader says...

I am a Singaporean student who is interested in building up a dividend portfolio.

I like to seek your advise whether it is viable to reinvest dividends into shares of the same counter, as the commission seems too expensive to do so.

Is there any way which companies can give out share in place of dividends?

Will this be a sound approach to building a dividend portfolio?

AK says...

If we are investing for income, we want our investments to be able to pay dividends in cash. 

Sometimes, companies might ask if shareholders would like to receive their dividends in cash or scrip (which means new shares)?

If there is an opportunity for arbitrage, then, for the income investor, taking the dividends in scrip might make sense.

And I mentioned it before:

"Many S-REITs have DRPs (or DRIPs), Distribution Re-investment Plan. Some readers asked me if I would take part in these plans.

"My answer is that I invest in S-REITs for income. So, I would usually take the cash distributions unless there is a chance to benefit from arbitrage which happened once before for AIMS AMP Capital Industrial REIT and some might remember that I blogged about it."

For those who are interested in this:

Always question how is the company generating cash and ask if the dividend being paid is sustainable.

Otherwise, we could be investing for growth or it might be a value trap or it could even be a scam (or maybe I am just talking nonsense here).

As you are new to my blog, you want to read this blog:

If we would like to invest the dividends we receive from our investments, there is no hurry to do so unless Mr. Market is in a big depression.

If we don't need the money, save the money.

Build up our war chest.

And pounce when opportunity knocks.

I know that patience is sometimes the hardest thing. 

I know because I am human too.

Related post:
Sit with all that cash and do nothing?


Spur said...

I've got a different take on this.

For someone who is in 20s and looking to build up a dividend portfolio over the next 20-30 years, it's probably OK to do regular "top ups" i.e. DCA over the months & years. Including re-investing the dividends.

However you probably shouldn't re-invest just the dividends if the amount is so small as to incur a transaction/commission cost of over 0.2%. Add it to your next DCA amount.

This also applies for your regular DCA ... if your monthly savings is too small such that your commission cost is over 0.2%, then accumulate your savings & do it quarterly or even half-yearly. In the long run over 20+ years, it doesn't make much difference if you DCA monthly or 6-monthly.

The biggest CAVEAT here is that you need to do your homework to ensure the underlying REITs / stocks are fundamentally strong & sustainable. Otherwise going for SREIT & STI ETFs is also OK if you prefer to spend your time & energy on career and family.

Why I don't quite advocate large warchest method for young investors?

Because of behavioral finance / psychology ... when the time comes, very few people can pull the trigger on a large warchest when they see their small investment portfolio decimated by -30% or -50% losses.

They will keep waiting for the all-clear, break of the falling trend line, break above major resistance, break above some moving averages, golden cross etc. From 2009 to 2012, most markets recovered 50% to 70%, but there were numerous corrections, volatility, bear analysts, mini crashes & mini shocks to keep a lot of investors waiting on sidelines, both seasoned as well as young millennials.

Humans being humans, I'd rather err on the side of getting it mostly right, than to wait for the perfectly mathematically logical solution that very few people can carry out.

It's a different psychology / ballgame for those who have already large fleshed out portfolios. ;)

AK71 said...

Hi spur,

Always enjoy your comments and it has been a while since you last commented.

Yes, I know people who were kept waiting for the STI to go lower during the GFC and they missed the boat.

This is why it is important not to focus on price but to know the underlying value as well.

Then, we will know if a stock is priced attractively and that is when we can deploy our war chest.

AK71 said...

Reader says...
Worse thing to do in investment is wait.

AK says...
Yes, patience is sometimes the hardest thing.

Mark Lim Teng Lye said...

I like the first comment by Spur - having a big war-chest and keep waiting, ending up "missing the boat". Actually, it is not about waiting or being patience; it is to know when "the boat have arrives and time to go on board". Otherwise, we may be still standing by the shore with our big war-chest and see the boat sails off, still thinking that we have patience, and wait for the boat to come back. Yes, some do come back, but not at the price we see value, especially for stocks that everybody is watching. (Happen to me now).

AK71 said...

Hi Mark,

Yes, it makes good sense.

We can rarely buy at the lowest prices but we can always buy at fairly good prices. ;)

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