What?!?
Have I switched camp?
Didn’t I write an article last June to share that investing for dividends is the Goldilock’s approach to build passive income?
I am not contradicting myself, but I have come to realise the label “Dividend Investing” can lead to misinterpretation for people who don’t find out what investing for income entails.
While it is a compelling label, the emphasis on “dividend” often distracts from the crucial aspect of “investing”, leading to flawed decisions and a negative experience.
It’s akin to the popular phrase “Every school, a good school.”
Without deeper understanding, it can distort the original intent: that each school strives to maximise every child’s potential in its own unique way.
The core principle is finding the right fit.
Having spent over two decades as an educator, I’ve observed enough students who struggled in prestigious schools, but excelled when they found the right learning environment — be it a different school or course.
Thus, instead of fixating on dividends, we should prioritise the “investing” part of “dividend investing”.
This entails investing in sound, profitable businesses that typically exhibit consistent growth, strong operational cash flow, and a solid financial foundation.
These companies, requiring less capital for reinvestment, are able to distribute surplus profits as dividends.
You might wonder,”Since it’s about investing, why not just invest in growth stocks?”
You are not wrong.
Investing in growth stocks could potentially provide much higher returns, and we could take profits from the capital appreciation*.
However, because stock price movement is a function of both the company’s financial performance and market perception, capital appreciation is not guaranteed.
For those without active income, consistent recurring income is invaluable. It removes the constant worry about stock price volatility.
To illustrate this concept, let’s take a look at my own dividend income.
The drop in dividends for the first quarter this year is primarily due to the advanced distribution of S$0.05 per share by Parkway Life Real Estate Investment Trust (SGX: C2PU) in the previous quarter.
Despite this, with the record final dividends and special dividends declared by Singapore banks, I am anticipating total dividends received for this year to at least match last year’s level.
Ultimately, “dividend investing” isn’t about chasing high yields; it’s about investing in solid businesses. Remember, focus on the “investing” first, and the dividends will follow.
Do your due diligence, understand the companies you’re investing in, and prioritise long-term financial health over short-term gains. That’s the key to building sustainable passive income.
*Just in case you are following a popular Youtuber who recently shared his “dividend” strategy, taking profits from capital appreciation is not dividend.
Discover more from The Fat Investor
Subscribe to get the latest posts sent to your email.