Lately, I did some reading on retiring in Malaysia. From which, I discovered:

  1. One in three Malaysians don’t have a savings account.
  2. 86% of Malaysian urban households do not have savings.
  3. 68% of EPF members aged 54 had savings amounting below RM 50,000.

Extracted from ‘Malaysians not saving enough for retirement’, The Star Online dated May 4, 2016

It’s a shocking revelation.

Clearly, it is a calling for all to assess our current financial positions and to plan ahead for our retirement.

Since 2011, the EPF has achieved commendable financial results and thus, enabling dividend payouts of above 6% a year. However, with continual rise in living costs, I believe we need to do more for ourselves than just placing money into our EPF accounts.

Let us assume. If you are 25 years old and have just landed your first job, how would you prepare for your retirement?

1. Start a Part-Time Business?
(Great idea especially if you are enterprising, driven and have the persistency to work it out. Your small business could be grown into a multi-million dollar empire.)

2. Invest in Properties
(Great idea if you have large amount of capital or if your parents are willing to ‘donate’ the down payment for your property.)

3. Invest in Stocks
(Great idea for people starting off with lower capital. Need time to learn, practise and master investing skills to boost success.)

In the absence of business ideas and huge capital, I believe many would choose to start by investing in the stock market with intentions to achieve both capital appreciation and dividend yields.

The magic of compounding dividend

Thus, I’ve decided to build simulations to find out whether one can retire comfortably through stock investing. This simulation assumes the following:

  1. Invest solely to achieve 6% in Dividend Yields a year.
  2. Dividends received are to be reinvested back to achieve 6% in Dividend Yields a year.
  3. Hold stocks over the Long-Term (With Little or No Short-Term Trading).

Investor A

  • Age: 25
  • Invest RM 10,000 a year until age 55.

Figures in RM

PeriodTotal New Capital InvestedTotal Dividends ReinvestedTotal Accumulated AmountDividends At Age 55
30 years300,000538,017838,01750,281

 

Notes:

  1. Investor A has invested a total of RM 300,000 in new capital into stocks that pay above 6% in dividend yields.
  2. During the 30-year period, Investor A would receive a total of RM 538,017 in dividends. From which, Investor A has chosen to reinvest them back into stocks that pay above 6% in dividend yields.
  3. In total, Investor A would have accumulated RM 838,017 by age 54.
  4. At 6% dividends, he would collect RM 50,281 in dividends. This works out to be RM 4,190 in monthly income to fund his retirement.

Investor B

  • Age: 35
  • Invest RM 10,000 a year until age 55

What if you’ve realised the power of compounding dividends later than Investor A?
Figures in RM

PeriodTotal New Capital InvestedTotal Dividends ReinvestedTotal Accumulated AmountDividends At Age 55
20 years200,000189,927389,92723,396

Notes:

  1. Investor B has invested a total of RM 200,000 in new capital into stocks that pay above 6% in dividend yields.
  2. During the 20-year period, Investor A would receive a total of RM 189,927 in dividends. From which, Investor B has chosen to reinvest them back into stocks that pay above 6% in dividend yields.
  3. In total, Investor B would have accumulated RM 389,927 by age 55.
  4. At 6% dividends, he would collect RM 23,396 in dividends. This works out to be RM 1,949 in monthly income to fund his retirement.

Clearly, there is a clear distinction between Investor A and Investor B. The magic of compounding dividends works in favour of investors who appreciate the wisdom and decide to invest early.

However, you may wonder, ‘What if, at age 35, I decide to invest more than RM 10,000 a year. Does it help to catch up years of not being invested?’ It seems logical. After all, most would have more income as a result of job promotion.

Thus, here’s a simulation of Investor C.

Investor C

  • Age: 35
  • Invest RM 20,000 a year until age 55

Figures in RM

PeriodTotal New Capital InvestedTotal Dividends ReinvestedTotal Accumulated AmountDividends At Age 55
20 years400,000378,039778,03946,682

Investor C has invested a total of RM 400,000 in new capital into stocks that pay above 6% in dividend yields.Notes:

  1. During the 20-year period, Investor A would receive a total of RM 378,039 in dividends. From which, Investor B has chosen to reinvest them back into stocks that pay above 6% in dividend yields.
  2. In total, Investor B would have invested RM 778,039 by age 55.
  3. At 6% dividends, he would collect RM 46,682 in dividends. This works out to be RM 3,890 in monthly income to fund his retirement.

Still, despite investing more, Investor A would derive more dividends than Investor C when they hit age 55. This is because Investor A has started investing earlier than Investor C.

And, that is the ‘Magically Power of Compounding Dividends’.

This article is sponsored by Securities Commission Malaysia, under its InvestSmart Initiative.

Securities Commission MalaysiaInvestSmart

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: admin@investsmartsc.my.

Stock 101 Quiz






KCLau
KCLau

Personal finance author and trainer

    30 replies to "The Magic of Compounding Dividends"

    • Remita

      How do we choose the right investment?

    • Siti Salwahida

      Good Idea

    • gordon

      How do we know how we are doing a good investment ?

    • SITI AMANDA NURKAMILA BINTI SUIB

      Good info

    • Zara Basheer
    • MURNI

      How do we choose the right investment?

    • mohd zaifol azhar bin salleh

      good ideal

    • Ng kim kee

      Good

    • Rosmawati Jamaluddin

      Memberangsangkan

    • Siti Sabariah Binti Ab Rahim

      Idea yang bagus dan boleh diterima pakai

      • mohd zaifol azhar bin salleh

        good

    • Siti khatijah binti kassim

      Good

    • kohila vani

      How the right investment?

    • Wan mahnun

      Great idea

    • suhaslinda

      How do we choose the right investment?

    • Rohelan bin Mat Daud

      Great idea

    • tq

      very good

    • TUAN BUSU BIN TUAN KECHIK

      fund distribution can choose to reinvest. You will gain in units.

    • Ruzilah

      How do we choose the right investment?

    • hpeng

      i am retiree with limited income.how to generate some income to live more comfortably.please KCLau advice

    • Raymond

      How do we choose the right unit trust?

      • KCLau

        Good question. I should probably do a webinar about this since I don’t think it can be explained easily.

    • Ridzuan

      The other option is put RM200k each into ASB1 and ASB2 and let the power of compounding dividend to work for you.

      • KCLau

        YES!

        • Cheah

          Sadly, only works for bumiputera. Non-bumi dont have such privilege to join ASB. Very very limited quota for non-bumi in government issued unit trusts fund

          • Darren

            Cheah, you can consider Unit Trust. The fund distribution can choose to reinvest. You will gain in units.

            • Christopher

              Hi Darren &KCLau,
              May I know any different between investing in Unit trust and normal stocks? For unit trust , Do we have any options to invest like stocks? May I know the average return from unit trust? I am new in investment. Thanks for your kind reply.

            • KCLau

              Unit trust is a pool of funds from different investors. The fund will be invested in various asset, according to the unit trust prospectus. Usually, it will be in stocks (stated as equity, growth fund, small cap funds etc).
              You can check out the return from the unit trust management companies’ website.

    • Keith

      I know in the United States, there’s an option to reinvest the dividend program offer by listing companies. This will help investor to save on brokerage fee. Does this program available in Malaysia?

      • Ian

        In Malaysia, there are a number of stocks that offer dividend reinvestment schemes. This means, a shareholder is able to elect a portion of their dividends to be received in shares instead of cash.

        These shares are offered at a discount to their respective current market price and shareholders can save on brokerage & transaction fees for receiving them. Some examples include Malayan Banking Bhd, RHB Capital Bhd, UOA Development Bhd, and Axiata Group Bhd. Related information are available in their respective websites under ‘Dividend Policy’. You may check them out.

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