The usual formula for success in our society consists of graduating with a respectable degree, finding a well-paying job, and climbing the corporate ladder. To accomplish this, and not be financially tied to your job, can take decades. But is there a quicker way to financial freedom?
There is and it comes in the form of dividends. Rather than working so hard for your money, wise investors let their money work hard for them instead. By investing in companies with strong business models, you can grow and compound your money, via dividends, over time as the overall portfolio grows larger.
Companies which throw off excess cash
Businesses that are performing well generate copious amounts of cash. This cash may then be paid out to shareholders in the form of a dividend. A dividend is a discretionary payment made by a company to shareholders as a method of rewarding shareholders for robust business results.
Many large blue-chip companies such as DBS Group Holdings Limited (SGX: D05) and Singapore Telecommunications Limited (SGX: Z74) pay regular dividends. Real estate investment trusts (REITs) such as Frasers Centrepoint Trust (SGX: J69U) and Suntec Real Estate Investment Trust (SGX: T82U) also pay out quarterly dividends, which are a good addition to one’s existing cash inflows from salary, bonuses and self-employed income.
Growing and reinvesting dividends
Investors should focus on growing their overall annual dividends by continually investing more of their savings into dividend-paying companies with stable operating characteristics and a prudent management team. This can be a gradual process of adding money slowly into the market at opportune times, rather than rushing to invest a lump sum of cash.
Reinvestment of dividends is a sure-fire way to increase your overall dividend payouts. One method is to use the cash received from dividends to buy more shares in the same company, while another method involves the acceptance of scrip dividends which are usually issued at a discount to the prevailing market price.
Turn the tables right now
It’s time to turn the tables – let your money work hard for you, instead of the other way round. Dividends are a good method to use as the compounding effect will ensure the overall portfolio grows, while also growing the annual dividends received.
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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 Royston Yang owns shares in Suntec Real Estate Investment Trust. The Motley Fool Singapore has recommended shares of Frasers Centrepoint Trust and DBS Group Holdings Ltd.