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Why Investors Do Not Need To Sell To Earn

Ser Jing - Do You Know Exactly How Much You Might Be Losing Out in Fees for Funds (pic) Tell me, how absurd do you think I am if I said that it’s possible for an investor to double his money in the stock market without selling a single share? You’ll likely think I’m nuts. But I assure you, it is possible. Let’s take the following three shares as an example.

Company Price on
2 Jan 2003
Total Dividends Declared from 2003 to 2012 Return from Dividends Alone
Dairy Farm Holdings (SGX: D01) US$0.90 US$2.04 227%
Jardine Matheson Holdings (SGX: J36) US$6.15 US$7.73 126%
Vicom (SGX: V01) S$0.62 S$1.24 199%

The second column on the table above shows the prices of Dairy Farm, JMH and Vicom that an investor could have invested in on 2 Jan 2003. The third column shows the total amount of dividends that the three companies have declared from 2003 to 2012. Finally, the last column shows the returns an investor could have gotten from just dividends alone had he bought those companies on 2 Jan 2003 and held them till now.

Win by being passive

Remember all the ensuing market troubles and volatility that the stock market went through from 2 Jan 2003 to 4 July 2013?

For a quick-and-definitely-incomplete sample, there was the Great Financial Crisis of 2007-2009, the Greek debt debacle in 2010, the American Fiscal Cliff scare in 2012, Cyprus’s bank bailouts on March 2013 and fears over America’s slowdown in stimulus efforts that flared up on June this year.

But yet, for the investor who sat tight and held on to those shares, all the while collecting dividends, he could have at least doubled his money even if those shares went nowhere for 10 years.

If capital appreciation for those shares were factored in, the gains would have been even more superlative. As of 3 July 2013’s close, Dairy Farm was selling at US$12.01 per share, JMH was worth US$60 a pop and Vicom’s shares were exchanging hands at $4.70. That would have translated into gains of 1234%, 876% and 658% respectively.

The business drives the returns

Thing is, these shares did not just appreciate in price and throw off solid dividends for no good reason.

Over the ensuing 10-odd years, Dairy Farm, JMH and Vicom’s businesses grew as cash flows and profits expanded – for example, from 2003 to 2012, earnings for those three businesses increased by 257%, 2457% and 224% respectively.

Ultimately, it was the businesses’ growth that gave shareholders those great returns.

And herein lies another lesson. It was true that all the various crises would have taken a toll on certain businesses and maybe even permanently damage some of them. But, not every business behaves in that manner. In fact, some could weather the storm and deliver solid long-term performances. And as investors, we’ll ideally want to find such businesses.

Foolish Bottom Line

In the stock market, we’re always given a choice to invest in the companies we think would be the best for us. Make those choices wisely and we might find ourselves earning a bigger income through dividends with each passing year as our ‘best businesses’ go on growing profitably. That’s when we don’t have to sell to earn.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.