Dividend Investing: Passive Income for Life

Continuing on my stock market blog where you buy shares to become a part owner of a company. The other way of earning, aside from capital appreciation (buy low, sell high), is through dividend investing.  The main goal of companies is to earn profit from their businesses. They can use the profit for further expansion, or they have the choice to give part of their profit to their shareholders in the form of dividends.

Not all companies give dividends in the stock market. Dividend payout differs from company to company, they can either be given annually, semi-annually, or quarterly. You can check here for the upcoming dividend payout for companies, you can also search for the stock that you want to check on whether they give dividends. I like dividend paying stocks because it has the best of both worlds, capital appreciation and dividend investing. This is what I primarily do in COL Financial.

Types of Stocks

There are 2 types of stocks: common and preferred. The main difference is that when it comes to dividends, preferred stocks are more stable and they have a lesser chance of capital appreciation. While common stocks have varying dividend payments, there’s also a chance they don’t give dividends, but they have a higher chance of capital appreciation. Dividends are given to preferred stocks before the common stocks.

You buy preferred stocks the same way that you would buy common stocks, through the stock market. The name of the preferred stocks bear the word “Preferred” or “Pref”. An example is GMA, it’s common stock code is GMA7, while it’s preferred stock code is GMAP. So what should you choose? If you’re starting out, it’s better to choose common stocks over preferred ones so you can maximize the capital appreciation. Personally, I don’t invest in preferred stocks yet.

When choosing a dividend paying stock, there are important dates that you need to check. The most important date is the Ex-dividend date, which is the date set by the stock exchange when the list of stockholders eligible to receive the dividend is finalized. If you want to purchase the stock to get the dividend, then you must buy before the ex-dividend date. 

Dividend Yield

Now that you know how dividend investing works, what company should you choose? You should consider companies that give consistent dividends and good dividend yield. The dividend yield is the result of the dividend amount divided by the stock price. You can check this for top dividend paying stocks in the PH for 2020.

From the table, you can see that you Company X is better than Company Y as Company X gives a higher dividend yield

So how frequently should you buy dividend stocks? A good strategy is to do Peso-cost averaging based on the dividend payout. For example, Company X gives dividends every quarter, so you’ll just buy every quarter just before the ex-dividend date. By doing so, you don’t need to time the market. You can watch this for an example. 

When you receive dividends, there is a 10% withholding tax, which is lower than the 20% for traditional/digital banks. The best practice is to reinvest the payout by buying more dividend stocks so you can maximize the power of compounding.  

REITs

We all know that investing in real estate requires a lot of capital, but aside from using Flint where you can invest as low as ₱1000, another way of investing in real estate is through REITs (Real Estate Investment Trusts). REIT allows the public to own shares of big properties with minimum capital and without having to worry about managing the day-to-day operations.

Source: Best REITs

REITs must be listed on the Philippine Stock Exchange (PSE), so it’s similar to a common stock. What’s great about REITs is that 90% of their net income is distributed as dividends. There are currently 2 REITs in the PH as of writing, AREIT (Ayala REIT) and DDMP (Double Dragon Meridian Park) REIT. Other REITs are coming soon such as Filinvest Land, SM Prime Holdings, and Robinsons Land.

Getting out of the rat race

Source: The Rat Race

As mentioned in Robert Kiyosaki’s book Rich Dad Poor Dad, we have to get out of the rat race, where we are in a never-ending cycle of working for money to pay bills. That means that when we don’t work, we don’t have income to pay the bills. So the strategy is to accumulate as many assets as possible that give you cash flow such as dividend paying stocks, instead of liabilities that reduce cash flow. 

To get out of the rat race, your passive income from your investments should be at least equal or greater than your expenses. Example: if your monthly expenses are ₱20,000 and your passive income is ₱25,000 per month. You can retire and do whatever you want and have peace of mind.

I highly recommend you play Cashflow, where your main goal is to get out of the rat race and be able to buy your dream. Through it, you’ll understand the concept of income, expenses, assets, and liabilities. It’s very addicting and you can play by yourself or with your friends. 

Financial Freedom

I complement dividend investing with MP2 that gives tax free dividends annually, and Flint that has monthly payout. My main goal is to reach financial freedom as young as possible. That’s why I’m maximizing my prime years by earning and investing as much as I can, while I still don’t have dependents. 

Always remember at the end of the day that investments is still a volume game. For example, even if your ₱1,000 doubles, you’ll only get ₱2000. Compared to if you have ₱100,000 and only got 10% returns, you’ll still get ₱10,000. You may get 100% returns in stocks, cryptos or other investments, but they are far in between. Don’t focus on getting the maximum returns possible on your investments, to the point of getting scammed, but focus on building your base as getting 10% is more achievable and you’ll still be able to reach your financial goals.

If you don’t find a way to make money while you sleep, you will work until you die.

Warren Buffet

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29 thoughts on “Dividend Investing: Passive Income for Life

  1. Good evening. Just a comment that you can still receive dividends even if you sell ur shares on the record date as long as you bought the shares before the ex-date.

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