Sunday, September 4, 2011

The Magic of Compounding Dividend

In the past, I would spend my dividends on food, clothing and entertainment. My initial investment aim is to create a dividend portfolio that generates enough passive income to cover my daily expenses while preserving my capital. However, a fellow financial blogger advise me to re-invest more of my dividends. Therefore, I have moved towards a new investment aim.

"To generate enough passive income to live off on and still have money left for investment. Make my money work harder for me."

Compound Dividends:
In order to fulfill my investment aim. I decided to use the power of compounding as Albert Einstein once said that it is the most powerful force on Earth. If you think the effect of compound interest is great, then compound dividends is like "compound interest on steroids". Without further ado, I shall share 2 compound dividends plans below.

Version 1:

Year Capital (S$) Capital + Dividends (S$) Dividends (S$)
2012 107,000 114,490 7,490
2013 114,490 122,504 8,014
2014 122,504 131,080 8,575
2015 131,080 140,255 9,176
2016 140,255 150,073 9,818
2017 150,073 160,578 10,505
2018 160,578 171,819 11,240
2019 171,819 183,846 12,027
2020 183,846 196,715 12,869

*Calculations are done based on an annual dividend yield of 7%.

Version 1 is a pure dividend re-investment plan. I will only use the dividends received every year to re-invest in dividend stocks. I do not need to fork out a single cent from my pockets. Therefore I can maintain a larger cash buffer. However, this process is rather slow. I will only reach S$12K in annual passive income at 36 years old!  

Version 2:

Year Capital (S$) Capital + Dividends (S$) Dividends + Capital Injections (S$)
2012 107000 122000 15000
2013 122000 137000 15000
2014 137000 152000 15000
2015 152000 167000 15000
2016 167000 182000 15000

*Calculations are done based on an annual dividend yield of 7% plus capital injections.

Version 2 is an accelerated form of the first. I will combine the dividends received with my own funds in order to reach S$15K for re-investment. This will speed up the compounding effect. By the end of 2016, I will achieve a dividend portfolio size of S$180K, at an age of 33 years old. However, this version requires me to be more disciplined in my spending and more aggressive in my savings. Secondly, I will have a smaller cash buffer. 

Version 1 is slow but safe. Version 2 is faster but riskier. I am leaning slightly towards Version 2 because I do not own a car or property, therefore no loans and mortgages to service. I believe I am not a spendthrift either. Therefore, spare cash will be available for investment. Of course, another way is to find higher yielding stocks. However, it is difficult to find blue chips that are yielding consistently above 7%, except Starhub. 

So, if you are in my shoes, which version will you choose? Or you have a better plan than my ones? Please comment below. ^^

Peace Out,
Dividend Warrior


AK71 said...

Hi DW,

It has always been Version 2 for me. It is the way to build up a significant passive income stream.

Version 1 works only for people who have used Version 2 before. ;)

Singapore Man Of Leisure said...

Hello DW,

I use version 2, but in 4 months time when I have no earned income, I will have to use version 1 - or a version of it. I hope there will be come capital gains (after losses of course!) from my swing trading to complement my dividends :)

Well, at least that's the plan. Reality is another matter... LOL!

Hey! If you are re-investnig your dividends, you are now also a Dividends Farmer (breed your dividends so they mulitply) - not just a Dividends Warrior (capture dividends)

Welcome to the shades of grey!

Drizzt said...

i would go with version 2 as well. but what is the long term dividend rate that we should use in our estimation?

my guess is 7%

FoodieFC said...

Version 2!

Anyway version 1 is perfectly fine too. And you are quite lucky. already getting so much dividends. I am just abt to get my first dividend from Mapletree commercial, Sabana and CapitaMall Asai - total not even $100. Thats shows how little I have to invest =(

How long have been in trading? I am just into my 4th month..

JW said...

Share share


la papillion said...

Hi DW,

There's practical to invest all the dividends back into the market even if you want to. I think the rate would be lower than this, so I think 7% is way too high over a period of say 10 yrs. There'll be 'losses' from not being able to invest fully all your dividends even if you want to, unless you subscribe to scrips instead of cash.

I will use neither version as all of them are shares so the price fluctuates and companies can go bust too. I will buy/sell at opportune times and take the dividends while waiting for the buy/sell cycle to arrive.

I think for truly PASSIVE income, it's not going to be purely stock dividends. It has to incorporate some (perhaps a major) part in high quality bonds.

But that's just me rambling on and on....well done, dw :)

Anonymous said...

The capital (S$) may also depreciate as price of stock drops due to the upcoming recession?

have to factor in too???

Dividends Warrior said...

Hi AK71,

I agree wif u. By the way, I think you were the one who advised me to re-invest my dividends if I remember correctly. ^^

Dividends Warrior said...


Yup. I guess I am slowly moving towards more of a dividend "farmer" bcos I m growing my dividends. No more a "warrior"......sob. LOL. I guess as my portfolio grows and I get older, my perspective changes.

Dividends Warrior said...

Hi Drizzt,

Yes, I assume I am able to maintain an annual yield of about 7%. Fingers-crossed. >_<"

Dividends Warrior said...

Yo Foodie,

Welcome to the dividend collecting club. Dun worry. I also started out small. Everyone started somewhere.

So keep on working hard and invest prudently, within your means. You will reap the benefits soon. ^^

I have been investing since Jan 2010. About 1 year 9 months.

Dividends Warrior said...

Hi JW,

Nice to hear from you.

Yes. Sharing is caring. This is wad my blog is all about. I welcome all forms of sharing. ^^


Dividends Warrior said...

Hi LP,

Your comment is much appreciated. It has set off many other thoughts in me. I am sure the other readers found it helpful too.

You are right. In reality, we might not get the stocks at the price we wan in order to achieve annual yield of 7% consistently over a decade. But I am confident of at least getting 6% yield. Not too bad.

I agree wif ur 2nd point too. There are many other ways of getting passive income, eg bonds. I am also exploring them. But for now, dividend investing is the most convenient, comfortable and suitable way for me.

Calvin Yeo said...

Hi Dividend Warrior,
You should definitely be going for version 2, you are too young to be not investing your active income :P

However, since you are coming towards 30, have you thought about investing in your first property? Property investment is another great form of Passive Income if done properly. If you are going to buy a house sometime down the road, you should also plan for at least the downpayment required and other misc. expenses.

Secondly, you may want to keep some spare cash to go in big on opportunities like recession. Being close to 100% fully invested all the time will leave you little opportunity to capitalize on a big downturn.


Dividends Warrior said...

Hi Calvin,

Thanks for visiting for my blog. ^^

Buying a property is definitely on the cards. But probably further down the road.

I am also starting to build up my investment funds.

Thanks for the advise!

Bang Hong said...

Hi DW,

Actually I do agree with some of them that version 2 is better.

HOWEVER, there is no need to invest. Sometimes waiting for better time will be ideal. I always wanted to buy Singtel, but the price is always hovering at $3++ , but i actually waited and bought it at $2.90, and i got the extra dividends this year. Bought it sometime around May 2011.

I agree that Dividend investing is powerful and good. I lost some money in Unit Trust, but for stocks is positive.

It is glad to see people saving, give each other moral support to save more for the future :)

xiehong20101 said...

Think difficult to say which version is better, need to adjust now & then. Wondering anyone can advise any good idea where to park the cash while you're waiting for good time to buy?

Anonymous said...

Hi DW,

I've just started investing and am very inspired by your journey. I'm still a noob and would like to find out how I can automatically re-invest my dividends instead of just collecting them. Is there a system in place to do this automatically, or do I have to manually inject more funds into buying more lots?

Thank you.


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