Invest for Capital Gain or Dividend?

There is always argument between whether one should go for capital gain or dividend when investing. With REITs under pressure over the past few years, it seems that this question emerged again in various forms. There are some discussion on this at InvestingNote and some members have shared some nice posts with compiled numbers. I will put the links at the end of this post.

If you asked me this question 10 to 15 years ago, I would definitely choose capital gain over dividend. However, my stance now is to have a mixture of both.

Why have my thinking change?

It is not that I think income investing is better than growth investing but I am just at a different stage of my investing journey. More about this later.

Breakdown of Current Portfolio Return

It happened that I was browsing at my return when the discussion was going on at InvestingNote. So I was curious to check out where the return from my portfolio comes from. Before I share my data, these are some caveats.

  • The data shared is over a very short period. The longest period is the duration of my current portfolio which is only 3 years 7 months.
  • The return compiled are based on the counters in current portfolio. It does not include realised gain/loss and does not include stocks that were fully divested.
  • I am the one who decided if the counters belong to growth or dividend. Some of these are in the semi-conductor sector which are cyclical in nature.

As such, nothing should be generalised from this set of information. However, they do act as a good indication for me on how different segments affected the performance of my portfolio.

It’s quite obvious that my growth counters are outperforming my dividend and REITs counters. REITs really struggled over the past 3 years. The only thing that is comforting is that the dividend dished out by them still outweigh the capital loss.

Similar return over different periods?

I am interested if such return has been the case over the different periods, so I took a snapshots of the returns at end 2022 and 2021. In another word, 3-year return and 2-year return from the time this portfolio was incepted.

While growth counters still rule over the different periods (especially during the pandemic year where many US growth counters hit a purple patch), the difference between dividend and growth counters weren’t as big over the 3-year period.

Also, notice the volatility in the growth counters. Yes, one might still say 42% return is still a good return over a 3-year period but imagine if this portfolio was incepted at end of 2021 with only growth counters, then the return for 2022 would be devastating.

What if I exclude the outlier (ie iFAST)?

iFAST has been my big winner in this portfolio. It accounts for about half my profit (realised and unrealised). So I am interested how things would look like if I excluded it.

Without iFAST, the 3-year period return of growth counters actually underperformed that of dividend counters! Nonetheless, they still prevail in other periods but it does show again the volatility of my growth counters.

Why I won’t go all growth?

Even though the growth segment of my portfolio is doing well, I am still going to stay with my current strategy. As I mentioned at the beginning of the post, I would have gone all growth if I was much younger. With a longer runway, portfolio would withstand the volatility and with constant capital injection, portfolio is likely to enjoy at least a mid-teen compounded return in the long term. That will aid in the growth of portfolio size.

However for the current moment, my portfolio is built with the intent to generate cash flow to partially fund my expenses. At the same time, I do hope to get some capital gain to gradually increase the size of my portfolio.

Hence for my income counters, even though the return might be lower and a few of them could even be making a loss, it really doesn’t matter. Of course, that is provided the fundamentals of the counter remain sound. Don’t get me wrong, it’s still painful to see the counters in the red but what really matter to me is if the companies or REITs can sustain paying out their dividend.

An example I would like to share is Venture. Its price has dropped by 17% this year but I am not too concern as it is very likely to be able to sustain its dividend. So it will continue to provide me with the same income regardless of its share price. On the other hand, with the likelihood of reduced dividend from Micro-Mechanics going forward, I had reduced my stake in it.

Capital gain or dividend?

It really depends on the intent of our investment.

Addition information

Make up of my Growth and Income Portfolio

Growth counters consist mainly of US counters. AEM, iFAST and Raffles Medical are my growth counters in SG portfolio. Income counters consist of HRnetGroup, Micro-Mechanics, OCBC, The Hour Glass, UOB and Venture.

Related articles and discussion on Dividend and REIT Investing

The Joyful Investors: Are REITs stable and safe investments?

Discussion on Dividend in InvestingNote based on Mr Loo’s video

Snow_ball: Comparing the TSR of SGX, Sheng Siong, UOB, Parkwaylife, Frasers Centrepoint Trust and Coke

Snow_ball: The great investing myth (4): Dividends matter

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