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Wednesday, January 6, 2010

Dividends Reinvestment Strategy Calculations

Some quick gross calculations by playing with Microsoft Excel in calculations. The table below assumes that I can save $35k this year and put it into interest generating equities of average 7.5% p.a. Then I reinvest every single dollar of the dividends back to the market every year, coupled with an increase of $1k savings per year. {I start with $70k in dividends basket}





Suppose I'm successful, my average monthly dividends will be like the chart shown below:



Sounds theoretically good right?
A few factors (positive and negative) that will deviate me from this ideal path:

1) $35k savings p.a.... I managed $50k savings in 2009, and I might be able to exceed it this year. In addition, the semi conductor company I worked in is reporting it's first profitable quarter, and with the reduction of rivals, consolidation is occurring in this industry. More profitable years are expected... and salary increases are expected... helping greatly in the $1k extra savings p.a.

2) I managed to achieve $50k savings in 2009 as a fresh grad because of my side income from giving tuition... But would I be able to sustain this lifestyle for the next 10 years till 35 yrs old where according to my table, my passive dividend income would reach $3.7k? A big unknown factor here.

3) 7.5% yield p.a.... Sustainable? Some might say that 5% is more reasonable...

4) When prices are over valued, I might sell some of my dividend holdings, resulting in a decrease in dividends. I might also make mistakes in choosing companies, which will result in decreasing dividends as well.

5) I might have a lost year or two in dividend investing when I get married or buy a property.

6) Potential capital gains/losses are not taken into account! Hence, actual gains could be more than 7.5%!


There could be many more factors, but the general result should still be about the same. Save + invest savings prudently will eventually lead to a respectable amount of passive dividend income.

Maths is so interesting sometimes...

9 comments:

  1. I loved your positive attitude towards this whole thing. Wished I had read your articles years ago, when I started working. Anyway, the feather in my cap is my fully paid HDB 3 room flat. Now stock piling my investment portion for that dividen income that will see me into & thru my retirement.

    ReplyDelete
  2. Hi Jimmy,

    I think at that time, I have not even started this blog yet :)

    ReplyDelete
  3. HI,

    So do you buy the stocks with generate dividends in one go with you savings? or you buy them in different time of the year? Sorry I am just a newbie..:) It's interesting reading your blog.

    ReplyDelete
  4. Hi Blog it,

    thanks for visiting! I buy when I believe there's value. Of course, prudent homework is necessary before choosing what to buy ;)

    ReplyDelete
  5. hey JW,

    i am also a newbie.. and i think i wanna get into an affordable reit for starters.. better late than never right?

    i wanna ask if there is a certain strategy.. like buy only when they are gonna declare dividend and sell when they pay out the dividend.. just so that you can reinvest into another counter come dividend payout date again?

    or you have to keep on buying..

    ReplyDelete
  6. Hi Anonymous,

    I employ a buy and hold strategy, of course with monitoring that nothing goes wrong. Of course, there are businesses like SPH, SingPost and SMRT which basically requires extremely low amounts of monitoring since we see it everyday just by being in Singapore.

    I don't buy blindly; I do try to think through my reasons for purchase before buying in nowadays.

    ReplyDelete
  7. The chart above looks very impressive. Reinvesting dividends can pay off over time. Thats for sure.

    ReplyDelete
  8. I can see that reinvesting dividends can pay off over time depending on the chart you have shown us here. While I am dealing with binary options right now, I never find the relativity of dividends to the stock am trading. I think affiliates programs binaryoptions-affiliate.com is much a pretty simple stuff to do rather than the real stock market thing.

    ReplyDelete
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