What do I mean by Dividend Stocks?
Definitely, I don't mean any stock that pays dividends or one time dividends.
Instead, I mean good quality stocks that pays regular increasing dividends over time.
Good quality meaning stocks of businesses that grows its EPS, DPS, NTA over time, run by able management and able to purchase at an attractive price.
By itself, this is very good to own already.
However, what are the other advantages of these Dividend (growth) Stocks?
Here are just 6+1 reasons why I love these type of stocks.
1. Regular Growing Income
My personal expectation is that one day, when I eventually retire, my dividend portfolio will replace my active income, to provide me with regular income, supported by sound growing businesses, that provides me also with a growing income over time.
Disclaimer: This sounds good in theory, but is not an easy thing to do for most people. Many reasons. For many people I met, the main obstacle, besides investment knowledge, is capital. The capital required to provide RM1,000 per month (a small amount) is typically 6 digit. E.g. 4% dividend yield to deliver RM1k per month or RM12k per year requires RM300k capital. Targetting RM10k per month requires RM3 million in capital today. For many of the "bilis" investors, this 7 digit capital is outside their reach.
2. Natural Inflation Hedge
One of retiree's greatest fear is inflation during retirement when there is no active income. A period of high inflation can erode what was originally a decent monthly income. Fixed Deposit investors in particular are at risk. To get a sense, if inflation is a high 6% per annum, after 12 years, the value of that income has halved.
So, to illustrate, let say, you aimed for RM10k per month income at age 60.
You decide to invest in FD to earn 3% per annum returns. (this by the way requires RM4 million capital).
And let's say real inflation (not headline inflation) is 6% per annum in the future.
So, how much goods and services can your RM10k income at age 60 buy, by the time you hit 72 years old?
Answer is half. Your 10k nominal can only buy RM5k in real goods and services, i.e. your income has halved! Suddenly, your RM10k can only buy half the goods and services! But you are 72 years old already and no longer able to earn an active income! What can you do? Not much actually.
And this is sure to happen again! Next 12 years, you turned 84 years old. Your original RM10k at age 60 can now only buy RM2.5k worth of goods and services i.e. you are literally very poor now.
In other words, inflation is one of the FD retiree's greatest fear. The other is outliving their capital.
Whereas what happens if you own a highly diversified portfolio of dividend growth stocks? You can reasonably expect that the above average, quality businesses that you owned will have revenues, profits and dividends are at least aligned with inflation. Your original RM10k monthly income at age 60, can still buy the same RM10k worth of goods and services by the time you hit 72 and 84 years old, notwitstanding 6% per annum real inflation.
So, clearly, FD can't do this. Incidentally, many life insurance policies that pays a yearly survival payment to you, also can't do this, if their yearly payments is a constant amount. What looks large today, will shrink by the time those payments are due 20, 30, 40 years down the track.
3. Lower Price Volatility
Older investors desire lower price volatility to their stock portfolio.
By and large, dividend stocks tend to have lower volatility.
But nothing is guaranteed.
To me, this is just "nice to have" but not essential.
This is because Mr Market ultimately controls prices. "Hoping" for lower volatility doesn't help with our mental health. Better to just ignore the price and focus on the underlying business - the EPS, the DPS, the NTA, growth and when it suits you, the price charts.
Successful investing doesn't have to be more complex than this.
4. Signs of good management
A growing profitable stock that does not share its profits with shareholders is too much risk for me.
Sure, sometimes, the price gains are good. But, other times, the market just refuses to recognize the value and one can wait for decades with no real returns.
Whereas a stock that has a CAGR growth in DPS over 10 years will keep rewarding me regularly. I don't have to do anything. It unlocks its value naturally and every dividend payment is welcomed.
As the business grows, it shares its profits proportionately.
All these is essential to me in Malaysia. This is because KLSE is not like US markets. All stock theory tend to originate in the US where market liquidity is very good and where US shareholder actions are common place.
However, here in back-water Malaysia, management and big shareholders can and has gotten away with a lot more than what they could in the US.
Hence, one huge advantage for me to own a growing stock that pays dividends is that I can be reasonably assured that the future profits will be shared with me regularly over time. Especially when we own a highly diversified dividend growth stocks (like more than 30 different stocks).
5. Keeps management honest
Experienced investors and I note that sometimes, when management has too much cash and doesn't share that profits with shareholders, it can lead to management doing stupid things with that excess cash and causes shareholders to lose.
A profitable company that pays regular dividends have lesser risks of that happening.
They can do stupid things still, but at least, you have received some of the cash already.
6. Your cash holdings naturally grow without having to sell anything.
If you don't need the yearly dividend income, the regular dividends received becomes a natural, easy way to build up cash over time, to take advantage of the next stock market crash.
If the bull market lasts 5-10 years and your dividend yield is say 5% over this period, that's 25%-50% capital returned to you in the form of cash after end of 5-10 years. That's not a small sum. And if the market crashed after that, you naturally have 25%-50% cash to take advantage of the lower prices!
This to me is a HUGE advantage.
Contrast the nil dividend stocks. The investor rides it up for 5-10 years and if he doesn't sell, probably rides it down after the crash, and still not have the cash to take advantage of lower prices. So, this speculator must sell to raise cash. Selling is not so easy for nearly all investors. Why? Because it requires another critical decision from you. You have to look at price charts, you have to ask yourself questions like am I selling too soon or too early, etc. It causes you to monitor the markets too much and likely to cause you to feel regret. In short, buying and selling tends to hook you into an emotional roller coaster that causes you to waste your time.
You bypass most of this by owning dividend growth stocks.
So, this to me is the beauty of dividend growth stocks. You sit tight and your cash just keeps growing and growing and growing.
7. Your account is biased to keep making New All Time Highs Regularly!
This is so under-estimated, until you actually proven this to yourself after many years. If you own a diversified portfolio of good quality growing dividend stocks, you don't have to do much and your account just keep making new all time highs regularly.
Do you know why this happens?
It's because of this price phenomena after a stock goes ex-dividend and the price falls.
If the business fundamentals remain intact, pretty soon, the price will tend to rise back to the former levels after paying you cash.
This happens so many times.
In bull markets, the price also makes new highs.
What a wonderful feeling, to keep seeing your accounts to keep making new all time highs reliably and regularly.
Summary and Conclusion
I have shared with you my 6+1 reasons why I love dividend growth stocks.
Come from another angle, particularly for those approaching 50 to 60 years old, as you get older, you want to retire comfortably. Not everyone of us can be ultra rich so much so that we no longer need to invest because our principal is so large that we don't need to earn any interest at all.
And we keep getting older after 60. 70 will come, 80 will come, 90 will come, where our cognitive ability declines with age. Essentially, you want someone else to work for you to generate income for you.
This is what a diversified portfolio of growing dividend stocks do for you. If you own 30 different stocks, that's like asking 30 different CEO and their teams to work for you during your retirement. Isn't that a lovely feeling?
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