Monday, September 8, 2008

Investments That Gives Dividends!

Banknotes from all around the World donated by...Image via Wikipedia When you buy into an equity investment (stocks or funds), you are mainly buying into the potential for capital appreciation and not so much for its dividend. However, when choosing an investment, a safer bet would be to go with the one with a consistent and sustainable dividend policy. Studies have shown this is a good barometer of future capital appreciation of an investment.

Dividends: Between 1872 and 2002, stocks returned an average compound rate of 9%. Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested stock dividends contributed 4.8% - more than half of the total return. Favor a stock with dividends for this very reason. You'll get paid to hold a stock while the market takes time to recognize its value

Further, to accelerate your capital appreciation, you should re-invest the dividends. Buying into more shares of the investment using the dividends received will enable you to receive more dividends in future. This is how compounding works. This also utilizes Dollar-Cost Averaging(DCA) as you are buying into the investment at different prices.

This should be the strategy for anyone who is between 20-50 years old as you have time on your side for your investments to do its compounding magic.

The end goal would be to create a dividend revenue stream from the investments that you can live on by 60years old.

If you do not intend to pass all of your wealth to the next generation, then you could also opt to liquidate part of your investment as and when needed for high-ticket purchases or lifestyle aspirations. Though you will need to plan properly as this will reduce your cashflow from the dividends.

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