We live in a world where almost everything seems to be about instant gratification. Many of us just can’t be bothered to wait for anything, anymore. Why wait for a cup of coffee when we can get it instantly out of a sachet? Why wait for something to defrost from the freezer when we can, with the press of a button, get our microwaves to take the pain out of waiting. I could go on. But I think you get the point. It therefore didn’t come as a huge surprise when someone asked me the other day if it was…
We live in a world where almost everything seems to be about instant gratification. Many of us just can’t be bothered to wait for anything, anymore.
Why wait for a cup of coffee when we can get it instantly out of a sachet? Why wait for something to defrost from the freezer when we can, with the press of a button, get our microwaves to take the pain out of waiting.
I could go on. But I think you get the point.
It therefore didn’t come as a huge surprise when someone asked me the other day if it was possible to achieve an annual income of 10% from an investment.
That seemed like a pretty tall order….
Cutting the mustard
…Right now, Singapore Bonds are yielding around 2%, and local time-deposit accounts are paying less. So those instruments aren’t going to cut the mustard.
We might get a little more if we look further afield at foreign currencies. But even then it doesn’t come anywhere near the desired 10% return.
We could look at the stock market. However, the Singapore market is currently only yielding around 3%. So that falls well short of the desired 10% mark, too.
What about Real Estate Investment Trusts or REITs? We are always told how fabulous the yields on these property investments can be. Alas, whilst they are good, they still fail to meet the desired 10% yield.
Currently, REITs yield around 6%. Some under-priced REITs might get us a bit closer but probably still not quite close enough. There could be valid reasons why they are cheap.
Perhaps the market doesn’t believe the distributions are sustainable. In which case, there is a fair chance that the payouts could be cut.
We could fish around the bottom of the market for some undervalued companies that might yield 10% or more. A quick scan reveals a number of companies that could have double-digit yields….
….But experience tells me that, more often than not, when something looks too good to be true then it probably is.
So, it looks like we might have hit a brick wall. But we Fools don’t give up that easily.
What if I told you that it is possible to earn an income of more than 10%? What’s more, it doesn’t require scraping the bottom of the barrel.
But it requires patience?
The clue to achieving a high yield is not through instant gratification. Nor is it through taking excessive risks. Instead, it is about prudent stock selection and careful planning.
Consider an investor who put $10,000 into Dairy Farm International (SGX: D01) shares in 2003. At the time, shares in the retailing giant that cost about $2.50 a pop were yielding around 3%. That’s nothing much to write home about. Or so you might think.
Farming for dividends
Five years later, the dividends of 8 cents a share had grown to 20 cents. After 13 years, the distributions had grown to 30 cents a share. In other words, an investment in the retailing giant that earned $320 in dividends in 2003 would have churned out $1,200 in 2016.
In other words, the yield on the original cost of the investment would be 12%.
There are a few takeaways here. Firstly, it is important not to underestimate a low yield, especially if a company has the capacity to grow its payout.
So, it is important to look for companies that have the ability to increase their dividends. Thirdly, compounding can be a powerful way to grow the payout over time.
And finally, if you want to earn a decent yield when you retire, you need to plan early. Don’t leave it till the last minute.
So join me and my team at Stock Advisor to find out how you can start building a retirement portfolio today. To find out more, just click here.
A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.