What is a Dividend?
I’ve shown in countless posts my dividend income on a monthly basis. For the benefit of new investors and the layman: “A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”
That’s the official definition.
Fun fact: Companies have been paying dividends to shareholders for over 400 years. The first company to ever pay a dividend was the Dutch East India Company in the early 1600s.
Cash dividends are usually distributed to shareholders quarterly. However, some companies pay dividends annually or semi-annually (twice per year). There are no hard and fast rule, each and every company determines its own payout schedule. Some companies will even pay a special (one-time) dividend every so often. These special payouts are separate from the company’s regular payout schedule and are not factored into the stock’s dividend yield.
As always, there are however always exceptions, some of you may notice up and coming growth companies do not distribute any dividends for the first few years. This is because management and major shareholders have decided to retain the profits earned by the business for one purpose – growth. On the other hand, some companies distribute 100% of their earnings as dividends to shareholders. These are mostly mature companies whose growth has peaked. Do note that a peak in growth does not mean that the company’s share price will not increase in value.
Why Do Companies Pay Dividends?
So your next question – Why does a company distribute dividends?
Companies sell shares to the public to raise money, which they then use to fund existing operations and expand their businesses. One way to look at a dividend is as a reward given to shareholders for owning stock in the corporation.
An example. Mr.S has saved up RM10,000 and plans to invest in stocks, he purchases 1,000 units of shares in Company A at RM10 per share. Now, Mr.S who previously had RM10,000 in savings is now an investor – he is a part-owner and shareholder in Company A.
As an owner of the business, one would generally expect profits generated from the business to flow back into his/her pockets. This is why a company distributes dividends. So for your long investing journey ahead, although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.
How Do I Collect My Dividend Income?
Collecting dividends from stocks you own in Malaysia easy. As long as you hold the share before it’s ex- date (short for ex-dividend date), you as a shareholder will be entitled to collect dividends.
And yes I know some of you may think –
”If that’s the case, I’ll just buy the stock one day before the ex-date. Get my dividends, and then sell them the next day.”
And you’ll be wrong.
Because the share price itself would drop by about the same amount on the ex-date.
Moving on, dividend payouts are issued on a per-share basis. Using the previous example, if Company A pays out RM0.20 per share, Mr.S would receive a total of RM200 (RM0.20 x 1000 shares) in dividends per year, which translates to a 2% dividend yield.
Investors used to receive their dividends in the mail via cheques. With the advancement of technology, dividends are most commonly deposited into a shareholder’s bank account directly. A dividend voucher will still arrive by mail with more information on your dividend income.
Below is an example of a dividend voucher I received from a company I invested in – Maybank.
Dividend Income Investing
I have tried timing the market and listened to all forms of ‘inside information’ and ‘tips’ from ill informed investors and let me quote Peter Lynch on this – “Behind every stock is a company. Find out what it’s doing.” Do not invest on hearsay and rumors, when you invest in a business, know what you own, and know why you own it.
Dividend investing is one of the most popular strategies for traditional, buy-and-hold investors. Typically dividend investing involves selecting companies which feature an attractive and sustainable dividend yield.
Dividend Magic’s Investing Philosophy
I see myself as a sort of hybrid dividend and growth investor. My current purpose for investing? To have a sustainable source of passive income which would eventually cover all my needs and wants. As of 2019, my dividend income per annum is RM16K. A summary of my dividends can be found at My Freedom Fund.
I am right now in the very fortunate position where when I invest in a company, I do not actually have to make sure it is paying dividends. The more important metric for me right now is profitability. And I mean long term profitability.
With my passive dividend income right now at almost 50% of my goal of RM36,000 p.a., I focus more on a stock’s value. Especially in the US, which I’ve started to invest in recently, you’ll see me having some tech stocks in my US portfolio.
Right now as of the time of writing – 2020, my Malaysian portfolio would focus more on stable dividend stocks. My US portfolio will focus more on growth and capital gain. A main reason for this would be the 30% withholding tax I have to pay on dividends in the US as a non-tax resident.
Do NOT be Fooled by Dividend Yields
It is important to know how stocks, dividends and dividend yields work.
Dividend investing does not mean you go about looking for companies with the highest dividend yields. Newspapers and online platforms are always publishing lists of companies that boast high and attractive yields.
As an investor, you’ll want to ask yourself why are the yields that high? Dividend yield is calculated by using the companies’ past dividends based on TODAY’s price. So please do not be fooled by lists like these.
My system of calculating my dividend yield is the opposite. I am using today’s dividends and dividing it by the price at which I first bought the stock. Ie. Dividends received / Gross investment.
If a company is doing well and increasing in profits every year, I’ll likely see my dividend yields increase every year too.
I have compiled the full list of my 2020 dividends received hERE.
For those of you who are not convinced with the power of compounding, I leave you in the good hands of Albert Einstein’s wisdom: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
To embrace and let time and compound interest work for you, reinvesting your dividends is key. In 10 to 20 years, you will see your portfolio snowball from mere thousands to millions.
For me, the key to stock investing is your investment period, if you are not willing to own a stock for at least 10 years, do not even think about owning it for 10 minutes. If the stock market keeps you up at night, you are not investing correctly, you should be able to see your portfolio decline by 50% without becoming panic-stricken.
My monthly dividends coming in are one of the few things that make me truly happy.
Thank you for reading.