Cashflow is important, as I have written earlier here.
One
of the ways to improve your cashflow is through dividend investing.
Passive dividend investing can help build a form of passive income. Not
only does it improve your cashflow, it also puts money into your
pocket, and you do not need to do much to maintain it.
Some of
my friends asked me, why invest so passively for dividends when one can
do short term guerilla trading, entering and exiting the market in a
short period of time and earn a lot.
To me, whether
a market goes up and down is mostly due to traders. Some will lose,
some will gain. But mathematically, logically and theoretically, the
overall gain of traders is equal to the overall gain of passive
investors.
Why is it so? It is because trading is a zero sum
game, so on average, some the traders would have gains more than the
passive investors, and some would have gains less than the passive
investors. The total gains of all
winning trades minus the sum of all losing trades would be equal to the
total gains (or loss) of the market. In addition, the gains of an
average trader would be the same as that of the market.
The
gains of passive investors, however, follow the market, excluding
brokerage fees, and minus the effort and energy used to identify stocks
in which to execute trades.
So, if
we think we are average, or below average, isn't it simpler to just
invest passively? Isn't it simpler to buy and keep stocks for the long
term?
Why dividend investing?
Dividend investing works
well for many investors. Dividend investing in defensive sectors will
continue to provide a steady stream of income – income that can be
counted on whether the market moves up or down. This stream of passive
income provides cash which can be used or reinvested. Reinvesting the
dividends will help the overall investment grow at a compounded rate
(excluding brokerage fees). Adding to the fact that stock values
traditionally increase over time, the new shares that are continually
bought with received dividends will also increase, and at the same
time, increasing the amount of dividends received.
Most dividend
stocks (bank stocks are an exception) are also usually not as volatile.
And because for defensive sectors, where dividends-payable are usually
stable, investors face lesser risks. This is especially important and
useful in a bear or sideways market, where investors will find it hard
to count on capital gains to give them the returns they need. Dividend
paying stocks also work well in both bear and bull market cycles.
During a bear market, dividends provide a return on investment when
gains from price appreciation are almost non-existent. During a bull
market, dividends provide additional returns on top of capital gains.
Finally,
for the Straits Times Index, it traditionally gains 7% compounded per
annum. Yet in a bear market as of now, there are many a defensive
dividend stock that yield 10% per annum. With dividend reinvestments,
that will yield 10% compounded per annum. And all these are excluding
possible capital appreciation!
Sadly, in a bull market with fast
and furious price increases to seduce investors, many forget about the
consistent returns and safety of the such stocks. History has proven
the benefits of dividend stocks in almost any market condition. And
with dividend reinvestments, one can generally expect increasingly
greater dividend income.