Is It Possible To Create Your Own Dividends?

Warren Buffett is famous for a few things.

He is first and foremost famous for being a great investor. Investors who had invested in Berkshire Hathaway in 1965 when Buffett took control of what was then a struggling textile manufacturer would have enjoyed a total gain of about 1,826,163% by the end of 2014.

Buffett is also famous for resisting paying a dividend. This created some tension between Buffett and some of Berkshire’s shareholders during the early days.

Buffett’s argument was that Berkshire should retain all its earnings so that he can redeploy and grow that capital. He argued that it is possible for Berkshire’s investors to create their own dividend policy with the company’s shares and not have to rely on the firm actually paying a dividend.

In here, I’d like to look at Buffett’s advice on creating your own dividend policy. Is it feasible in Singapore?

Buffett’s create-your-own-dividend idea works something like this. If you’d need a 6% “dividend” from your investments each year, you can create that stream of cash flow on your own by selling 6% of your portfolio every year. If the overall portfolio is still growing, there is a good chance that your portfolio might become bigger even if you sell off 6% of your total portfolio annaully.

Such a strategy seems feasible – but only if your portfolio is big.

If you have an equally-weighted 10-stock investment portfolio worth a million, a 6% withdrawal would be S$60,000 – selling $6,000 worth of shares in each of the 10 counters should be feasible.

Now imagine if you’ve an equally-weighted 10-stock portfolio of just S$10,000. Now to withdraw 6% ($600) from that, you’d have to sell just $60 from each counter.

That’s very hard to achieve in practice, especially when considering that Singapore’s current board lot size for trading is 100 shares. Factor in commissions as well (which should eat up a huge chunk of your individual sale proceeds), and the create-your-own-dividend idea simply doesn’t fly.

Foolish Summary

So, it seems that Buffett’s advice on creating your own dividends might only be suitable for those with a sizeable investment portfolio.

In any case, it might also be wiser to simply reinvest all our dividends as and when possible if our portfolio’s still small. In that way, the magical effects of compounding can work even harder for us.

As an example, investing $600 annually over 20 years at a 10% annual return will see the $12,000 invested amount ($600 x 20 years) become more than $38,000 at the end of 20 years. Even by just investing tiny amounts each year, your portfolio might reach a sizeable amount very soon too.

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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 writer Stanley Lim owns shares in Berkshire Hathaway.