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The Power of Dividends

Credit: Simon Cunningham

We, Singaporeans, love our dividends.

Popularity of stocks such as Singapore Post Limited (SGX: S08) and StarHub Ltd. (SGX: CC3) is evident of the statement above. Shares at both the giants have grown some 90% for the past five years while the Straits Times Index (SGX: ^STI) has also amassed 26% during the same period.

What’s the reason behind the rise?

Consistent Dividend Payers

The postal outfit has been consistently paying 6.25 Singapore cents per share since 2007 while the telecommunications company has rewarded shareholders handsomely by dishing out 20 Singapore cents per share since 2010. Before that, dividends have been increasing constantly every year from 9 cents in 2005 to 19 cents in 2009. Comparatively, dividends at the proxy of the Singapore market, STI ETF (SGX: ES3) have fluctuated over the years.

Real estate investment trusts (REITs) too have been popular in Singapore. REITs are required to distribute at least 90% of their taxable income as distributions to unitholders to be tax exempted. Therefore, unitholders get a steady stream of moolah rolling in. Who wouldn’t like the sound of coins dropping into their bank accounts every few months or so?

Meaty Dividends

Psychologically, dividends declared may sound too little as they are declared in cents. This is especially true if you own just one or two lots of Singpost or Starhub, for instance. However, the “insignificant” dividends add up over the years to produce a mountain as seen from a recent post by SGX My Gateway (emphasis mine):

“Over the past three years, dividends have been responsible for one-third of the Straits Times Index’s (STI) total returns. The index generated 20.5% price return with compounded dividends boosting that return to 31.8%, which means that the annualised return was 9.6% over the past 3 years. One-third of STI’s returns over the past 12 months were attributed to dividend returns.”

For every dollar of total returns (capital appreciation plus dividends), 30 cents was due to dividends alone. This is a significant amount. S$10,000 invested in 2011 would have turned into S$13,180, with dividends, at the end of three years. In contrast, without dividends, the same S$10 grand would have given S$1,130 lesser.

Now, let’s stretch out the time frame longer, from three years to 12 years and see what transpires.

Since 2002, STI ETF has given total returns of 177.3%. Without dividends, the return is 90.8% during the same period. If we do some quick calculations, we would realise that dividends accounted for nearly half, at 48.8%, of the total returns. That’s the power of dividends.

In a similar fashion, it was reported that “dividends have accounted for nearly half (46 percent) of total return for the S&P 500 Index during the past 25 years. Put another way, if you’d reinvested all dividends received since 1989 into buying additional shares of stock, your total return would be nearly double the return if you’d done nothing.”

Foolish Bottomline

Dividends have a huge part to play in an investor’s portfolio. Even though dividends may seem insignificant, they add up over the years to create a huge cash pile. Over the past 12 years, half of the total returns alone were due to dividends at STI ETF, an index tracker of STI.

In a future post, I will reveal how you can spot the next great dividend paying company such as Singpost or StarHub. Do look out for that.

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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 Sudhan P doesn’t own shares in any companies mentioned.