Here’s a question:
‘Hi, I am new to stock investing. Should I invest for capital gains or dividend yields?’
For a start, there is no right or wrong answer to this question. It is possible to build yourself a sizable portfolio regardless of your own preference between the two. With that said, however, after I have communicated with my pool of readers at Bursaking.com.my, I think, it is better for you to focus on investing for dividend yields if you are a complete beginner.
#1: Dividends are more Predictable
Dividend income is more predictable than estimating capital gains. After all, dividends are cash whereas capital gains are merely on paper gains and they are subjected to changes on a daily basis. Your investment returns would not be ‘Yo-Yoed’ based on the ups and downs of the stock market. Instead, you’ll enjoy certainty of income flowing into your bank account on a periodic basis if you choose to invest for dividends.
#2: Dividends Pay Your Fixed Bills
This leads to Reason #2. Regular dividends pay your fixed bills. This includes your rent, mortgage, car loan, utility bills, Astro, insurance and grocery. Even if you had the above covered, it is nice to have a nice ‘makan’, movies, dating, wall climbing, or a ‘Cuti-Cuti Malaysia’ trip paid for with dividends. It is only for investors who are receiving dividend income regularly, not one who is for capital gains where their gains are mostly on ‘paper’, if any.
#3: Dividends Build Your Confidence
Often, investors receive their first dividend income into their bank accounts within 3 – 6 months after making their stock purchases. Subsequently, based on their stock purchased, they would receive dividends either on a quarterly or semi-annually or annual basis. Imagine. If you are a new investor and had started to receive cash returns every 3 months once from your portfolio, you would probably feel ‘good’ about it regardless how the price of your stock is moving. Even if the stock had fallen in price, at minimum, you will continue to receive cash returns from it. At least, the stock is ‘good for something’ and it incentivizes you to keep it over the long-run.
#4: Dividend Investing is Less Risky
Here is a definition of a good stock investment. It is one where the stock has great fundamental qualities and its price is attractively undervalued. In other words, the stock must be good and cheap. Often, stocks which are consistent in their dividend payouts possess great fundamental qualities. These include having a resilient business model, great management team, a healthy balance sheet and a proven track record of growing profits consistently. As such, you would minimize your risk or chances of making poor investment decisions if you just stick to stocks that have the qualities above.
#5: Dividends Build Your Portfolio
Earlier, I’d mentioned that you could use dividends to pay for your expenses. But, what if you are currently making tons of money and do not need to rely on dividends to fund your current lifestyle? Is dividend investing still suitable for you? The answer is ‘Yes’. This is because you could reinvest your dividend income into another dividend stock or stocks that you preferred, thus, allows you to further expand your portfolio in the future. In other words, over time, you may not need to save money to invest, but instead, using more dividends to fund your future investment. It works like a cycle where you use profits to generate more profits.
#6: Why Not Capital Gains?
Does it mean that investing for capital gains is not good? Nope. Investing for capital gains is good if you are more sophisticated as an investor. This means, if you are a skilled investor, then, your chances of achieving capital gains will be greater than one who has no skill at all. In most cases, people who are into capital gains but without any sort of skills are often gamblers and speculators in the stock market. They are often thrill-seekers where the stock market is a legalized casino. They are not necessarily profit-driven, which is completely a different mindset with stock investors as they are very profit-driven.
#7: Dividend Investing is Investing with Clarity
How do I tell the difference between an investor and a speculator? It is quite easy. First, if a person tells me that he is investing for capital gains, I ask him: ‘How much capital gains are you expecting?’ If his reply is: ‘I don’t know’ and often, that is quite a standard reply, I would classify him as a speculator. This is because true investors had already calculated their expected returns before buying into a stock or any investment. For example, if you ask a dividend guy what he is investing for, his reply would usually be: ‘I’m expecting to make at least 5-6% from this stock investment.’ Definitely, he is investing with clarity and with purpose, not so much into luck, rumours, tips, or comments.
#8: Dividend Investing is Simple.
Dividend investing helps new investors to make stock investment decisions easier, faster and better. These decisions made are mostly based on facts and figures, logic, and common sense. Thus, if you know how to do some simple maths, you can become successful in dividend investing. Here’s a quick way to determine whether a stock is undervalued or overpriced. First, the reason why people invest in stocks is to earn more than how much banks are giving in Fixed Deposits which is around 3%. Hence, any stock with dividend yields below 3% is overpriced. On the flip side, if the dividend yield of a stock is 5% and above, investors may look into it as it is considered to be undervalued at its current price. Thus, dividend investing is a simple system which promotes one to ‘Buy Low, Hold for Dividends, and Sell High.’
Dividend Yield = (Dividends per Share / Current Stock Price) x 100%
#9: Dividend Investing is Investing for Capital Gains
What? Am I serious? Yes. Investing for dividends is investing for capital gains. Why? This is because stocks with consistent dividend payouts are in demand by a larger pool of investors. They include EPF, KWSP, Tabung Haji, insurers and mutual funds, particularly income funds. These institutions have billions and are still receiving billions for investment purposes. In this time when the markets are uncertain and volatile, these large institutional investors may be adopting a defensive stance to their portfolio as they are expected to perform and deliver returns to their stakeholders. It may explain why dividend stocks tend to achieve sustainable capital appreciation over the long-term.
Where do I learn More?
Here, I’ll list down three quick materials which are helpful to you if you are interested to learn more about dividend investing:
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