Dividend investing is simple.
It is widely used to build a portfolio to generate regular dividend income.
Imaging yourself receiving dividends for almost each month every year from your portfolio. What’ll these streams of income mean to you and your family?
- Nice dinner treats or little indulgences every now or then?
- Gym or massage memberships on a monthly basis?
- How about a fully-paid vacation to your preferred destination?
- A choice to pursue a passion project or a semi-retired lifestyle?
- Or all of the above?
The possibilities for using dividends are endless. But beyond finances, receiving dividends regularly can be liberating emotionally. There is just a sense of security, a peace of mind and great comfort to know that cash is flowing in from our portfolios.
Now, what if you are new to investing?
Is the above possible for you?
The answer is yes.
The key is to start today and build on your portfolio patiently for years. Remember, time is needed to build anything meaningful – including a sizable portfolio. Here, I’ll share how you can get started, eliminate time-wasting activities and improve your chances of success in dividend investing. Thus, here is an easy guide to begin dividend investing:
1. What is Dividend Investing?
Dividend investing is about accumulating shares of businesses to earn increasing dividends for the long-term.
Accumulation is about buying to keep, just like how you would treat a marriage. It’s long-term. The mindset is different from people who are into short-term trading gains.
2. Where Do Dividends Come From?
Ultimately, dividends are paid out from regular profits generated from businesses (in cash).
So, the more cash flow these businesses could generate, the more dividends they could pay out in the long-term. That’s why dividend investors would check their operating cash flows to see if their figures had been consistently growing over time.
Increasing Operating Cash Flow = Increasing Dividends
If operating cash flows had grown consistently over time, that means these businesses were ones, which could realise profits into cash flows efficiently. Also, it shows that these businesses had been able to grow its profits consistently over time.
Increasing Profits = Increasing Operating Cash Flows
Profits are what’s left of revenue after deducting off all its expenses. So, businesses that can grow profits over time are ones that could increase revenues and control costs over time.
Revenue – Cost = Profits
Since revenues are generated from sales volume and selling prices, dividend investors would seek businesses that can attract and retain customers for repeat sales at higher prices in the long term and avoid others that are constantly engaging in price wars to entice customers.
Sales Volume x Selling Prices = Revenues
As for cost controls, dividend investors would prefer businesses that have some bargaining power, also known as leverage, with their suppliers and distributors. Such a power will allow them to have better cost control, thus, leading to improving profit margin. This could ultimately contribute to the overall profitability of these businesses.
In summary, here is a typical mental model used by investors in dividend investing:
3. How to Find These Businesses?
These businesses are not hard to find.
Most probably, you could be a paying customer of these businesses.
Just simply go through a list of where you had spent your money for the past two weeks. It is quite likely that you paid for products and services delivered by businesses that are owned by investors.
You would come out with at least 20-30 public-listed companies within minutes.
Of which, you can download their annual reports and start assessing their track record in terms of revenues, costs, earnings, operating cash flows and dividends. Of which, you can choose to build a watch list of 10-15 of these companies to study further and be updated on their latest progress for the future.
4. What Prices to Pay for these Businesses?
Perhaps, some may question: “Haiyah, if these businesses can pay out steady growth in dividends, their stock prices would have been ‘very high’ already!”.
If so, is it too late for newbies to start dividend investing?
Answer: “Absolutely not”.
While most people in the stock market focus on “stock prices”, dividend investors would focus on a stock’s valuation. Valuation is measured based on P/E Ratio and dividend yields.
Here is a quick example.
Supposedly, we have two stocks: A Company and B Company.
The stock price of A Company is $1.00. The stock price of B Company is $100.00. Instantly, there’re people who think that B Company is expensive (not investable) because its stock price is higher. In investing, such a view is flawed.
Now, let’s say A Company pays out $0.01 in dividends per share (DPS). B Company pays out $5.00 in DPS. So, A Company’s dividend yield is 1% a year while B Company’s dividend yield is 5% a year.
A Company’s Dividend Yield
= DPS / Stock Price x 100%
= $0.01 / $1.00 x 100%
= 1% a year
B Company’s Dividend Yield
= DPS / Stock Price x 100%
= $5.00 / $100.00 x 100%
= 5% a year
In this sense, despite a higher price, B Company is ‘cheaper’ than A Company for its dividend yield is much higher. Based on this scenario alone, investors would prefer B Company over A Company.
The applications of P/E Ratio and dividend yield are an art form. But suffice to say, most people in the stock market tend to focus on price while investors focus on valuation.
That makes a lot of difference in dividend investing.
5. Your Journey Ahead in Dividend Investing
The above is just the tip of an iceberg when it comes to the subject of dividend investing.
The important thing here is to get started, learn and hone your skills along the way. As investors, in the journey of building portfolios, we are bound to experience both successes and losses-incurring mistakes. Personally, I’m able to invest in better stocks at better prices and earn better returns as I continue to learn, improve and master this skill.
But, that doesn’t mean I didn’t do well in my first two years of investing.
The first two years of dividend investing had allowed me to carry on investing so that I could learn how to position myself for greater opportunities for the long run. As such, if you are new to the fine art of dividend investing, the focus should be on learning, sustainability, confidence building and to gain invaluable experience in the world of investing.
Upon which, you’ll do great things with your investment portfolio.
Remember: The best time to start investing was yesterday. The second best time is today.
In closing, here is a quick link to a FREE webinar session for you if you are looking to explore how to up your game in dividend investing:
- How to build a dividend stock portfolio that delivers steady cash flow.
- Why yield keeps increasing over time based on cost.
- Simple, proven strategies to make money from stocks—without gambling on market movements.
