Re-invest your dividends

Re-invest your dividends

Much has been written in The Sunday Times Invest pages about investing for yields in these uncertain and inflationary times.

Based on the performance of Reits and high dividend paying stocks like the telcos and utilities, it appears that local investors need no further convincing.

However, buying a stock for its high dividend payout is only half the story.

To make an investment work as well as it ought to, a good investor must complete the other half of the story.

And that is re-investing the dividend.

Re-investing income from an investment, be it dividend, coupon, interest or rent, is a simple concept but it takes a strongly disciplined investor to abide by it.

Many ordinary investors tend to be lax about their investment income.

If you don't believe me, ask yourself this question: How closely do you track the interests and dividends that you receive? Even if you do track them closely, what do you do with them?

For some, investment income is treated as bonus money to be spent.

A friend, J, who has a rental property, tells me that she uses the rent she collects from her tenant to pay for her overseas vacation.

As she is a wage earner, she considers her rent money as extra spending money.

Don't get me wrong. I'm not saying that investors must live like a scrooge in order to maximise returns or that J is wrong to splash cash on an expensive holiday.

The point I want to make is that expenses should not be premised on the belief that investment income is spare money. It is not.

This is because the value of our principal is constantly being eroded by inflation. The dividend cheques that come our way are nominal returns, that is to say, they are not adjusted for inflation.

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