The Greatness of Dividend Investing

I would like to first highlight that the title above is just to seek attention.  Personally, I believe there is no best investment strategy and techniques, because if there is one, there won't be so many school of thoughts surfacing on the financial sphere, claiming that their methodologies are the best.  In my opinion, the 'best' strategy is one that is most suitable for you yourself, as a trader, an investor or a speculator.  As such, I do not understand why there are investors out there who openly criticize, to the extent of condemnation, other investment strategies, where they use highly selective and biased data to show the cons of other strategies in order to prove their point that their selected strategy is the best.  I understand it is always healthy to discuss the pros and cons of every strategy, so as to provide various perspectives the supporters of a particular strategy fails to see.  However, berating other strategies is entirely uncalled for.  For me myself, dividend investing is the most suitable strategy for myself to follow.  I would like to highlight the pros of dividend investing, and I am not going to do that by criticizing other strategies.

This comparison and debate came to the limelight recently because of the video by The Fifth Person on the SGD 200K annual dividends renowned local investor AK71 managed to collect in the year 2022.  Upon further digging, there are in fact many local dividend investors, retired or semi-retired, who are doing very well besides AK71.  Based on the local bloggers who reveal their dividend income in their blogs openly (in the past and present):

Sanye's Investment Portfolio: SGD 198K/ year (in 2019)

STE's Stocks Investing Journey: SGD 189K/ year (in 2022)

Monthly Passive Income: more than SGD 120K/ year (in 2022)

Singapore Dividends Collector: SGD 71K/ year (in 2021)

Cory Logics: SGD 62K/ year (in 2022)

Happy REIT Investor: SGD 60K/ year (in 2022)

Snowball: SGD 55K/ year (estimated in 2022)

Dividends Warrior: SGD 35K/ year (in 2022)

Towards Financial Independence: amount unknown, but believed to be significant. 

And many other 'smaller' dividend investors who are in the process of accumulating and building up the portfolio, like myself.

Being a practitioner of dividend investing myself, I believe the advantages and beauty of dividend investing are as follows:

1)     Steady Stream of Income

Listed companies in Singapore pay out dividends quarterly, semi-annually or annually, as such, dividend income for the year tends to be lumpy, bountiful in some months and 'droughts' during certain months.  This serve as a steady stream of income because regardless of market sentiments and share price performance, as long as the companies continue to pay out dividends, the income will not stop, though the amount may fluctuate.  To make the income stream more stable and predictable, I plan to accumulate minimally 6 months of dividends before performing any dividends drawdown when I FIRE in future.  For instance, if I plan to start my FIRE journey in January 2026, I will reinvest dividends until June 2025.  From July 2025 onwards, I will collect and accumulate all paid out dividends in a high-interest savings account, and by January 2026, will withdraw a consistent amount monthly from the savings account for my expenses.  This will allow me to 'smoothen out' the dividend income to ensure steady stream of income.  

In addition, as 6 months of prior dividends are also collected in the account, it enables me the flexibility to pre-empt if I should spend a little less during foreseeable recessionary times where dividend cuts may be possible.  If 6 months of prior dividends do not seem sufficient, it can be increased to accumulate 12 months worth of prior dividends.  Personally I think this is important for retirees seeking consistent income.

2)     Dividend Growth

Good companies also have the track record of growing their dividends year on year.  This definitely helps to improve efficiency of compounding during dividend reinvestments, and improve income in future during drawdown.  

Understandably, good companies may also deliver dividend cuts due to macroeconomic environment, such as current times of high interest rates.  This is most prominent now in REITs, whose business model involves leverage.  Nonetheless, how well the portfolio can tide through such times will depend on the diversification of the holdings in the portfolio.  Many critics of dividend investing constantly find fault with the bad performance of REITs, understandably, it shows a lack of their understanding in dividend investing.  

To all dividend investors, REITs will be part of our portfolio, but it is not the only sector.  Singapore banks are also good dividend generators, and they perform exceptionally well under current high interest rate environment.  There are also many other sectors that pay out dividends, including F&B, Technology, Utilities etc.  As long as proper diversification is done, that will definitely help to cushion any adverse impact on the dividend payouts under different macroeconomic conditions.

3)     Company Quality

Dividend payout can also be a means for investors to evaluate the financial health of the company.  If the company suddenly cut dividends, stop paying dividends, or when their dividend payout is higher than the companies' net income, these poses red flags to investors, a sign for investors to scrutinize the financial reports of these companies.  It can signal time to run.

4)     Compounding Effects

Reinvesting the dividends can propel the value of the portfolio and compound the returns.  Personally I am a bad trader, and through personal experience, I get better returns through dollar cost averaging and reinvesting all the dividends.  In my view, this compounding effect helps me accumulate wealth and generate more income year on year, bringing me closer to my goal of Barista FIRE.

Besides the pros mentioned above, there are also flaws in dividend investing.  There are, but not limited to, sudden dividend cuts that may impact investors' income, extremely high dividend yield which present themselves as yield traps where capital losses due to plummeting share price cannot be recovered from dividends collected, lack of propelling growth in the companies due to lower retained earnings for research and development and thus lower capital appreciation in share price etc. 

In conclusion, I believe every type of investing has its own pros and cons.  I believe every investor has their own reason, belief to chose their favored type of investing strategy.  Dividend investing, as much as I recommend it, it has its flaws.  What is important is that we recognize the flaws of our chosen strategy and keep a lookout of the pitfalls that may otherwise turn against us.  Channel News Asia has a recent interview with two local dividend investors here, which further acknowledges that dividend investing has its part to play in one's portfolio.  As such, respect every investor and their investing philosophy in their own right.  Disapproving one's strategy may solely just be due to your personal inability to see the beauty of the other strategy.  Nonetheless, may every investor do well in your investment journey ahead.  Barista FIRE, here I come...!