Ideas on How To Become Rich - The Dividends Issue
I was surfing the net when I came across an investment blog dedicated to helping people learn about investing based entirely upon dividends. The author was arguing that one way of getting rich - definitely getting rich - was by having dividends accrue over time. He seemed to be arguing also that capital gains cannot be relied upon because of the famous EMH (if you didn't know what that was, it's the very famous and very falsified Efficient Market Hypothesis). I must say that I have a more than passing interest in the subject of investment, so here I am to give some opinions on dividend investing.
Can investing in dividend paying companies really make one rich?
The investment literature is divided on this one, with some arguing yes and some saying no, so let's not look at that.
Let's look at the logic.
If dividends were 10% a year, and one merely reinvested dividends year after year in companies that paid the same percentage of dividends, this would be one great idea. It's definitely workable in investment theory.
But this assumes that inflation is low, taxes on the dividends are low or nonexistent, and certainly alsoassumes that you can always find companies that pay 10% dividend. I am a sporting person and would be willing to say that this is not possible (to consistently find high paying dividend stocks). In fact, it is hard enough as it is finding companies that pay dividends consistently.
Aha, some people say, in investment you can always find companies that have consistently paid dividends over the years. Some call them dividend kings, others call them aristocrats of the stock market, others call them Coca Cola, bla bla bla. Yes, that seems workable and that seems true.
But the issue is that if they are that reliable and always pay dividends, then the stock price would most likely reflect this.... which means that their payout rate has to be low, i.e. less than 5%, say 3-4%? The prices would reflect this high dividend payout. The rest is purely mathematical, with higher prices meaning that even high payouts have a low percentage return.
I have no reliable statistics on this. One Singaporean stock market site goes 8% in the long term but remember this is driving by the rear view mirror. As my favourite investor Buffet says, if all there was to stock picking is past performance, then the best investors would be librarians! Something like that; I am paraphrasing from memory and from impression.
So.... I'd say that dividends can make you have a regular income, and can discipline savings. Those are good things. This is because you regularly get a paycheck and you can be disciplined enough to reinvest and reinvest your dividends, in order to get compounding to work for you. Those are indeed good things.
BUT it is highly unlikely that a pure dividend investment strategy would work. Perhaps one can try a growth strategy that also pays minimal dividends.... you would be happy to wait for the growth whilst holding on to at least some small returns. A mixed investment strategy would definitely pay off better in the search to become rich rather than a fixation on dividend paying stocks.
This investment topic is quite complicated, so I will come back to it in a second post, on why dividend stocks may not grow as fast as growth stocks. Stay here with me; thanks for reading and cheers!
Ideas on how to become rich - today's topic: dividends
