Tuesday, February 12, 2013

Thoughts on Dividend Investing

The question is why invest for dividends? Investing in dividend stocks can be slow and boring as the stock prices may not be moving significant. However, there are many valid advantages to consider dividend investing:

Firstly, good dividend stocks can offer regular cash flow, on top of capital appreciation. A strong dividend-payment company that is making money will generally appreciate over time, as the dividend will offer support for the share price during poor market sentiments and may limit any significant downside on the stock price.

Generally, the stocks will have less volatile price swings, as these are stocks supported by many like-minded long-term investors. As such, it may create resistance to short term traders/ short-sellers to move the prices significantly.

Thirdly, dividend investing also offers an advantage of compounding gains in reinvested dividends. With an stable appreciating dividend stocks, reinvesting may create a safety barrier of entry due to averaging up. For illustration, say you have invested 10 lots of stock X at an average price of $1, and the stock appreciates over time 1 year later to $1.50. If you will to reinvest another 10 lots at the current price of $1.50, your average entry price will be brought down to $1.25 (a 25 cents buffer for risk of price correction)

Another interesting thought is that the dividends received can be viewed as a discount on your average entry price. Say you have bought StarHub at the last closing price of $3.93. With an annually 20 cents dividend payout, you would have recovered back all your capital in 20 years in dividends, plus you still have the shares intact in your CDP account earning consistent passive income in future dividends. And with Starhub's strong performance and earnings, it may be possible to increase it's dividends payout, in which case, the breakeven period will be shorter than 20 years.


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