Is 5% in Dividend Yield too Little in Stock Investing?

Lately, I had the opportunity to conduct a Dividend Yield Masterclass, a webinar session sponsored by Bursa Malaysia to encourage savvy stock investing. Out of which, I received a question as follows: 

‘Hi, I’m Sam. I have RM 10,000 set aside to invest in stocks. If I invest my money the way you did, at most, I would earn around RM 500 in dividend income. This is too slow. Are there better ways to invest in stocks to achieve better returns?’ 

I had a hunch that Sam is fairly young and new to stock investing. Thus, it made the webinar session a lot more meaningful. This is because there are many who believe that stock investing is an act that aims to double or even triple capital in a short span of time. Earning 5% in dividend yields is just too damn slow. 

So, how did I answer Sam? Is dividend investing a slow train to riches? Is capital appreciation the big money in stock investing? Here, I’ll share my views: 

#1:  What Stock Investing Really Is?  

Like Sam, most people think that stock investing is about achieving quick capital gains by predicting stock price movements. Hence, many are hoping to increase their capital, let’s say RM 10,000 to RM 15,000, RM 20,000, RM 30,000 … etc as quickly as possible, without much effort. 

That ‘thinking’ is far from how savvy investors view what stock investing is. 

In its essence, stock investing is an act to build sustainable long-term wealth via accumulation of shares of good businesses. Stocks are viewed as assets that are able to earn higher income, hence, paying higher dividends and enjoying a raise in its share price for the long-term, if they are good. Instead of viewing it as a 1- Year or 2-Year thing, when savvy stock investors invest in a stock, their intention is to own and accumulate its shares for as long as possible. It could be forever. 

But, won’t investors want to sell their stocks if their prices have increased? 

Nope. Let’s use Warren Buffett as an example. I have studied his annual reports for 1995 and 2008. Here is what I’ve found: 

The 13-Year CAGR is only a measure of the capital growth of his stockholdings. I did not include his dividend income received from these stocks. Hence, his total returns from the three stocks above is a lot higher than their 13-Year CAGR. The point is this – Do you think Warren Buffett would ‘sell’ all of his shareholdings in the three stocks (and many more) to enjoy capital gains? 

Most likely, the answer is nope. 

Why? This is because his stocks are cash-cows which had, are, and will continue (most likely based on their financial track records) to generate strong earnings and cash flows for years to come. He is an investor who made his billions through accumulation of good businesses. He does not speculate, gamble, or bet his way to riches. 

As such, I reckon that if you are like Sam, you may want to change your thinking about what true stock investing is. If you can visit your local bookstore to read a book or two on Warren Buffett, that would be very helpful and is an investment (book price is less than RM 100) that yields greater than stocks itself. 

#2: Dividend Yields vs Capital Gains

There is a belief where a person would not achieve great capital appreciation if he chooses to invest for dividend yields. Thus, many people who intend to reap capital growth would shun away from dividend paying stocks and would opt for stocks that are categorised as cyclical, turnaround, deep value, penny stocks, or small caps, … etc as they believe these would reap better results than ones that pay consistent growth in dividends. 

Inevitably, there are some who knows what they are doing and did well. But, in most instances, they don’t have a clue on what they are doing. This had caused them to reap inconsistent results with some stocks going up, some stocks going down further, and some stocks moving sideways (doing nothing). 

I’m a dividend investor who invests primarily for recurring dividend income and my question is: ‘Who says that you won’t enjoy decent capital growth if you opt to invest for dividend yields?’ 

That belief, I think, is flawed. 

Instead, I find that investing for dividend income is a more practical method for anyone who wishes to invest for capital growth without taking much risks. Why is that so? Here, I’ll briefly list down my reasonings: 

1. Stock prices go up if there are more people buying its shares than sellers. 

2. Stock prices go down if there are more people selling its shares than buyers. 

3. Let’s focus on the buyers. Who are the buyers? 

4. They include retail investors (like you and me) and institutional investors. For instance, they may include pension funds, sovereign wealth funds, insurers and mutual fund companies which have billions of dollars to invest. 

5. People who have billions to invest would invest differently from other people who have lesser, especially speculators who are in just for ‘fun’.  

6. Most of these billion-dollar institutions are conservative for they promised a consistent returns to their clients or contributors. EPF is one example. Today, in a period where uncertainty is the only certainty, these institutions would adopt a more conservative approach when investing. 

7. Calculating dividend yields from a stock that pays growing dividends is easier and less complicated than estimating potential capital gains for no one can accurately predict where the market is heading. But, all of us can find out how much dividends a stock had paid for the last 10 years and thus, assess its ability to pay out dividends in the future. 

8. That is why stock that have resilient business models, great financial records, and the ability to grow profits and dividend payouts in the future are preferred due to their ability to be consistent and durability in bad economic situations.
   
   
   
9. This is why, in both good and bad times, these stocks are attractive to billion- dollar institutions for investments. They have lesser volatility in stock prices for these investors are in for the long-term. 

10. Think about it. Do you think EPF will sell all of its shareholdings in local bank stocks (Public Bank, Maybank, CIMB, RHB, … etc) simply because EPF had heard of some ‘news’ or ‘rumours’? They do not buy or sell a stock in order to react to the latest news in the market. 

11. For speculators, they do react to news, rumours and ‘insiders’ stuff. As such, they may buy shares of a stock (let’s say, a penny stock) after they had received positive news on it, thus, driving up its stock price. But, shortly after, if they had received negative news on the same stock, they would sell their shares, causing its rise to end and stock prices to plunge quickly. 

12. Investors who are conservative in nature (have more capital-in-hand), thus, would most likely avoid speculative stocks and go with something stable, strong and predictive in terms of income. 

13. That is why dividend-paying stocks (the consistent ones) tend to have better and sustainable capital growth for the long-term for the stocks are preferred by a bigger pool of investors who have bigger amount of capital.
    
    
    
14. In other words, dividend investors can reduce their investment risks and, at the same time, increase their investment returns.

#3: Higher Returns than 5% in Dividend Yields 

To Sam, I reckoned him not to get into stocks for a couple of reasons: 

1. He is not ready to get into the stock market. His mindset of attempting to get rich quick from stocks without a proper game plan is not helpful and could have resulted in financial loss and griefs to Sam, if he pursues it. 

2. Most likely than not, Sam does not have a financial plan. Perhaps, it could be more helpful for him to buy life and medical insurance or reserve a fund in case of an emergency. I believe this is important as one should build wealth over the long-term sustainably, and not just merely chasing money aimlessly. 

3. It is okay to start investing with RM 10,000 in initial capital. I began with very little capital too. But, money itself is not sufficient to make you into a profitable investor. It is knowledge and wisdom. As such, it is better for Sam to invest a lot more into learning about stock investing before pursuing it. 

Instead of chasing multi-baggers aimlessly, I opine, it would be more helpful for Sam to invest his RM 10,000 into ‘himself’. It can be a course where he can pick up a skill that is tradeable or scalable for higher income, whatever they may be. This would be a lot more impactful to Sam’s financial life for Sam is able to raise his income substantially (and it’s for a lifetime) by offering his skills and services to more people for he adds value into their lives. 

Sam may come back into the stock market once he has more money, received a lot more investment education, and has a game plan to efficiently make money from investing in the stock market.