Monday, March 4, 2019

Dividend Investing Is Actually Growth Investing In Disguise

Even though I spend a lot of time writing and circulating about my dividend focused strategies, I am not entirely opposed to anyone who focuses on profit growth strategies that meet the needs of their own portfolios.

Both dividend investing and growth investing have their own merits.

I mean, if we look at the classic example of folks who invested in Berkshire for the past 30 years, without having received a single dividend paid to them, who am I to critic the success of growth investing, which can be very successful in its own rights.

There are 2 basic criterias required for growth investing.

First, the company needs to have a certain level of business moat in order to have the opportunity to expand, both vertically and horizontally. With ubiquitous of massive competitions these days for certain industries, there are doubts on whether companies can survive the following year, let alone thrive in the next 10 years.

F&B business is one of them where competitions for new entrance are high up to the neck as we see many F&B come and go everyday.

Even for industry leaders such as Apple, there are much more competitions in recent years with the introduction of a cheaper, more affordable and better specs phone in the market.

This makes the "Growth" aspect in growth investing a very difficult decision to make.

Second, you need to have a good capital allocator in the company who is able to look out and spot for good opportunities and reinvest the proceeds of the retained earnings for further growth.

The second point is actually not much different from us, except that we have management whom we trust will do the right job to steer the company and propel its' next growth.

These management are not immune to making mistakes, like all of human being, so they are not all saints-free from mistakes.

Some of these management may also move to other companies, or retire so there are huge reliance on human personnel in this case to get the work done.

Dividend investing, on the other hand, is similar to the second point I have raised, except this time that personnel is us, ourselves.

That makes us accountable for our own money.

We learn, groom and develop our own strategies so we can have a better knowledge tomorrow.

We leveraged on our past mistakes to become a better investor today and face the task of tomorrow.

Through many years of dividend investing myself, I do think there's an appeal in having cash come your way on a regular basis, organically through the profit sharing structure of dividends at the high-grade quality companies.

If you are vested $100,000 in a company that pays you 6% dividend a year, you are technically getting back $6,000 in dividends a year while keeping the number of shares in the company intact.

As a capital allocator yourself, you are then free to either reinvest the $6,000 back into the company by buying more shares or if you prefer, you can invest the money into other companies that you are interested in.

Either way, that looks like growth investing to me because you are increasing the number of shares in the company you are vested in, with the main difference through capital injection rather than internal allocation within the company.

If you want to spend your life being a capital allocator, it seems to me that income investing is the way to go.

Income investing also has more options in a way that you can actually choose to 1.) save the dividend received as part of your warchest or 2.) spend it away as you wish.

The basic assumption of this is that the company will adjust its pricing to its product based on inflation rates so if inflation rates rise at 3%, the company will adjust their pricing to be higher and hence bottomline is higher and your dividends would follow the same suit.

That is of course all well in theory but plenty of moving variable parts in real life.

At the end of the day, I think my argument for dividend investing is that we can see it as a growth play too through the increasing of vested position through dividend reinvested but it has also a variety of options available too that an investor can take.

You get to choose what kind of path appeals to you better.

Thanks for reading.

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  1. I couldn't agree more to what you have explained here. Dividend Investing Is Actually Growth Investing In Disguise. Investors need to know it and focus on the same for better results.

    1. Hi MMF

      Thank you for your affirmation as always :)

  2. In some countries, taxes can be an argument against paying out too many dividends. Not true for Singapore of course.

    1. Hi erleb

      Indeed, in Singapore, we are a tax haven where companies can set up and pay a much lower taxes than anywhere else in the Grade A region.

  3. Hi B,

    Personally I believe the prospecting part of sustainable dividends or growth in dividends in companies is very much the same as growth in investing.

    But I also think the 2 have different considerations in terms of risk-reward profile and should have different allocation to a portfolio, among other risk management consideration.

    Just my 2 cents

    1. Hi SI

      Thanks for your views.

      You are right, their risk reward profile considerations are totally different in nature so the percentage in the portfolio should also vary. Maybe it's just me that has biased against growth companies because of my lack of skills in prospecting them.

  4. How about growth-dividend investing i.e lower dividend payout ratio e.g less than 60% and 4 to 5% on initial investment cost?

    1. Hi Uncle CW

      All else equal, I'd rather they pay out more dividends to me with their sustainable but high payout haha

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  6. Hi B

    Will you consider investing in Berkshire as a non dividend paying stalwart? Or will you prefer managing your money yourself?

    Do you have experience in growth stocks since they are not exclusive from your dividend strategy?

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