Imagine earning a consistent income from your investments without having to sell a single share. This is the allure of dividend investing—a strategy that not only seeks to grow your wealth but also ensures regular income streams, providing financial security and peace of mind.
Dividend investing isn't just for Wall Street experts or the ultra-wealthy; it's a practical approach that everyday investors can leverage to build long-term wealth. Whether you're a novice dipping your toes into the investing pool or a seasoned investor looking to diversify, understanding how dividend investing works and how to get started can open doors to financial opportunities you may not have considered.
What is dividend investing?
Think of dividend investing like growing your own cherry tomato plant or basil plant. Each time the plant reaches the harvest stage, you get to enjoy its fruits or vegetables. After harvesting, you let the plant grow again until the next harvest.
If you like that idea of regularly enjoying the “fruits of your labour”, you would probably love the idea of dividend investing. In dividend investing, you buy stocks that consistently distribute dividends, usually twice or four times a year. These dividends can come as cash payments or additional shares of the company.
Let's consider an example. Imagine you purchase 200 shares of a company for $15 each. Each share pays an annual dividend of $0.75. With a total investment of $3,000, you would receive $150 in dividends over the year. This results in a 5% dividend yield.
Dividends received = $0.75 x 200 = $150
Dividend yield = $0.75 / $15 x 100% = 5%
Which market can we consider for dividend investing?
For the purpose of income investing, we typically tend to focus on the Singapore markets, particularly Singapore REITs—real estate investment trusts. These investments are known for their ability to generate regular dividend income, making them a popular choice for those looking to build a reliable income stream.
Below is a screenshot of the recent dividends we received from one of our S-REIT holdings, Mapletree Pan Asia Commercial Trust (MPACT) $Mapletree PanAsia Com Tr(N2IU.SI)$.
MPACT Dividends June 2024
While some of you may not be familiar with MPACT, you’ve likely visited VivoCity in Singapore for shopping or perhaps work at one of MPACT’s offices, like Mapletree Business City in the Alexandra Precinct. These properties are managed under MPACT’s portfolio.
This means that instead of just spending money at shopping malls, you can actually invest in them and earn returns from the malls that previously earned money from you. How cool is that? Why not aim to collect more in dividends from these investments than you spend at their malls!
Mapletree Pan Asia Commercial Trust (MPACT) is a real estate investment trust which invests in 18 retail and office properties in the key gateway markets of Asia (including but not limited to Singapore, Hong Kong, China, Japan and South Korea). They have a total lettable area of 11.2 million square feet valued at S$16.5 billion.
Mapletree Business City & VivoCity under MPACT
Key benefits of dividend investing in Singapore
While there are dividend aristocrats in other countries, we prefer to focus on the Singapore markets for dividends due to several key benefits:
1. Dividends are not taxable in Singapore
One of the most significant advantages of investing in Singapore stocks for dividends is that dividends distributed are not taxable in the hands of the shareholders. This feature makes dividend investing in Singapore particularly attractive and cost-efficient for retail investors.
In contrast, investing in dividend aristocrats in the U.S. subjects you to a 30% withholding tax. Taxation rules vary by country, so it's essential to check the specific rates if you're considering dividend stocks in other markets.
To understand how the taxation may impact you as an investor, let’s analyze a theoretical scenario.
Theoretical scenario:
You hold 10,000 shares of Company A at a cost of $2 per share. Company A declares a dividend of 10 cents per share. If the dividends are not taxable, you will receive the full $1,000 of dividends, giving you a dividend yield of 5%.
Dividend yield = $0.10 / $2 x 100% = 5%
However, if you are taxed 30% on the dividends, the net take-home amount will be just $700. Correspondingly, your yield will be 3.5%.
Dividend yield = $0.07 / $2 x 100% = 3.5%
While 30% may not seem significant at first glance, consider that the typical dividend yield on average is about 5%. A 30% reduction leaves you with a yield of only 3.5% yield, which means you may only just slightly beat inflation, assuming an average inflation rate of 2 - 3% a year.
Furthermore, given that some robust S-REITs provide decent yields, the absence of dividend taxation makes investing in Singapore stock markets for dividend income even more attractive.
2. S-REITs are required to distribute at least 90% of their taxable income to unitholders
Another advantage of investing in S-REITs for dividends is that they are required to distribute at least 90% of their taxable income to unitholders to qualify for tax transparency treatment by IRAS. This works in favour for investors, as it helps ensure that S-REITs maximize the distributions to their unitholders, providing a reliable income stream for those investing in S-REITs.
Which group of investors is dividend investing suitable for?
To address this question, we need to delve into the primary goals and objectives that dividend investors typically aim to achieve. Generally, these objectives can be categorized into three different groups.
The first objective for dividend-focused investors is to retire and live entirely on the dividends received. This group of investors is either already in retirement or approaching it. Their top priority is to have an investment portfolio that generates regular and consistent income to cover living expenses without needing to sell their existing stock holdings.
The second group comprises investors who simply appreciate the concept of receiving steady cash payouts. While growth stocks often offer higher investment returns compared to dividend stocks, some investors prioritize the tangible cash inflows over potential capital appreciation. This preference is a significant factor driving certain investors toward dividend investing rather than growth investing.
While it's commonly assumed that dividend investing primarily appeals to older investors approaching retirement, this notion isn't entirely accurate. In fact, the landscape of investing has evolved to accommodate a diverse range of strategies and preferences, regardless of age.
Young investors, in particular, are recognizing the value of incorporating both growth and income elements into their portfolio construction. For these younger investors, constructing a balanced investment portfolio entails more than just chasing high-growth opportunities. Instead, they adopt a nuanced approach, blending growth-oriented assets with income-generating investments. This strategic allocation allows them to benefit from the potential capital appreciation offered by growth stocks while also harnessing the stability and regular income streams provided by dividend-paying assets.
In this context, dividend investing assumes a pivotal role as the defensive component of their overall investment strategy. The consistent dividends received from these investments serve as a reliable source of income, regardless of fluctuations in market conditions.
How can we get started on dividend investing?
Since late 2021, the S-REITs market has experienced a sell-off due to the higher interest rates, which can impact its financing costs and property valuations. While interest rates are currently still maintained at elevated levels, we are possibly near the peak of the interest rate cycle, with anticipated rate cuts on the horizon.
In this context, investors have a unique opportunity to accumulate assets in the currently undervalued S-REITs market. By investing in S-REITs now, you can take advantage of the lower purchase prices, positioning yourself to enjoy higher yields in the future as the value of these assets appreciates.
According to the SGX data, the FTSE ST REIT Index is currently trading at a Price-to-Book ratio of 0.87x, against its 10-year average of 1.03x – which showed a discount of over 15%.
Source: SGX
Additionally, S-REITs offer one of the highest dividend yields and lower volatilities compared to its counterparts, such as the US REIT Index and the Hang Seng REIT Index.
Source: SGX
If you would like to capitalize on the undervalued S-REITs market and learn how you can build up your own REITs portfolio, join us in the upcoming session of How To Build Passive Income With Singapore REITs workshop.
In this workshop, we will guide you on applying a framework to cherry pick S-REITs to invest in and share how you can buy your selected S-REITs at reasonable prices. The workshop includes hands-on activities to help you immediately put your learning into practice. You may find out more details on the in-person workshop and save your seat using the link below.
Sign-up here👉 bit.ly/reitsworkshop
$LION-PHILLIP S-REIT(CLR.SI)$ $CapLand Ascendas REIT(A17U.SI)$ $CapLand IntCom T(C38U.SI)$
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