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5 Dividend Investing Truths You Need to Know (and a Bonus Segment on how to protect your portfolio from market meltdowns)

Irving Soh
Irving Soh

It always seems so easy. The whole damned industry seems to want people to think dividend investing is easy.

It’s not.

It’s hard as hell and nigh impossible if you’re not mentally ready.

I’ve extracted these learnings from my many interactions with Christopher Ng Wai Chung, our dividends aficionado who aptly coined dividends as the “opiates of the masses”.

I hope this article helps shed some real light on what you need to succeed as a Singaporean trying to take this path forward.

#1 – Easy to Say, Hard to Do

If you understand anything about dividend investing, that you understand that buying up dividends is simply a straightforward pure play on compound growth.

Below represents what $2,000 per month invested at 10% returns look like over 30 years starting with $20,000.

You want the truth?

Any monkey on the planet can plug in a rate of return (10%), capital sum required, and monthly contributions and give you a fantastic amount because compounded growth is a spectacular bloody mechanism.

I’m serious though.

Any monkey with a compound calculator can do it.

The hard part of the whole damned model is that it’s difficult for people to follow suit. It’s really, really difficult for people to change their habits and stay consistent.

Save $20,000? Contribute $2,000 a month into an account to buy $24,000 worth of stocks each year? Not touch all that juicy, delicious cash waiting for you for a WHOLE YEAR? Much less twenty bloody years?

Moreover, for the next twenty years of your life, where you’re expected to get married, have kids, build a family, take care of your parents, buy a house, own a car, possible bury some friends and loved ones and take your family out to other countries, maybe pursue higher education?

Yeah. Easy? Think again.

It’s not impossible.

But it sure as hell isn’t easy.

#2 – Protection. Protection. Protection.

I mentioned earlier that the basic set up of a dividend investor is to keep investing $2,000 a month (as well as all dividends received every year!!) to achieve rapid compound growth.

But its kinda hard to do that if you’re not covered.

I recently paid nearly $5000 in MRI and related medical bills. If it weren’t for my personal accident coverage, I’d be wiped out in terms of savings.

When I count my lucky stars, I count my PA coverage twice. The hard lesson most folks learn early on in their investing career is that they’re under-protected.

I’m not a financial advisor, so take what I say with a pinch of some salt.

But I honestly think most people need points 1-4 before they can invest.

  1. 6 months expenses saved up in case of a loss of occupation.
  2. Personal accident coverage
  3. Hospitalisation coverage
  4. Critical illness coverage
  5. If you have dependents, Life Insurance,
  6. If you’re earning a lot of money, income replacement in case of disabilities that prevent work

This is to ensure you are a) sufficiently covered from unpredictable life circumstances and don’t have to touch your investment portfolio for cash and b) can invest with a peace of mind knowing if something DOES happen, you’re covered and so are your dependents.

Do not invest without at least the first four points in place. Get them early. Make sure there’s sufficient bandwidth in them to cover you.

You’ll find investing much easier to do without having to worry about random stuff derailing your life.

I recommend using MoneyOwl for this.

#3 – You Can’t Eat Your Dividends Until You Hit Your Second Milestone

Yes. You heard me. Dividends cannot be consumed.

Yes. For twenty years. Don’t even think of touching ONE CENT you received from your dividend portfolio. Every last bit of it goes back into investments in a lump sum together with your savings each year.

This necessitates discipline, but also requires progress checks, for how can one stay sane in an era where they don’t see their progress?

So what’s a dividend investor to do when it comes to checking progress?

Just like a gym junkie, I recommend against checking out if you gained any muscles after each gym session. You always look bigger/more toned after and smaller/less toned before.

There are two definitive milestones that should keep YOU happy.

The first milestone is when your trailing twelve month dividends received from your portfolio is sufficient to offset your trailing twelve monthly expenses.

1st milestone

  • trailing 12 month dividends received: $12,000
  • trailing 12 month expenses total: $12,000

Why?

Because this means if and when you lose your job, you get to enjoy your current lifestyle presuming no serious loss of capital in your portfolio.

But this is just a milestone. Yes. By all means, celebrate it. But by no means do you rest.

You rest just a little bit when you hit your second mile stone – which is when your trailing twelve month dividends is 4x your trailing twelve month expenses.

2nd milestone;

  • trailing 12 month (ttm) dividends received: $48,000
  • trailing 12 month (ttm) expenses: $12,000

At this point of time, you should be pretty happy. You can probably safely retire presuming your TTM dividends received is 4x your TTM I’m-Happy-Spending-This-In-My-Retirement-Per-Month amount.

If it isn’t, I recommend you keep compounding your wealth by reinvesting excess dividends or simply upping your contributions as your salary increases over the years.

#4 – Dividend Investing is Not Passive

Lots of people got sucked up then massacred in the Hyflux crisis precisely because none of these guys looked at the financials of Hyflux.

Fun fact –> Hyflux, Best World, Noble Group, Starhub, Singtel, M1 has never once appeared in any of our dividend portfolio screeners.

When we screen for companies, we’re looking for solid stable cash flows capable of sustaining dividends well. We apply a composite factor search function comprised of multiple valuation / financial metrics which we then further pare down in order to see what can do well moving forward.

There’s a lot more, but investing is basically a beast on its own right. It’s not a “set and forget” kind of strategy. Yes, we monitor it less compared to other strategies, but it’s still not entirely passive. That’s a common misconception that spells disaster for unprepared folks who set, walk off, then come back to find companies they invested in bankrupt or dead.

Go look back 20, 30, 50 years. Most of the companies that existed back then are no longer around today. If that doesn’t tell you how much it matters to keep at least 1 eye on your stocks, nothing will – and you’re better off not investing.

#5 – A Little Note on Life

A little note on matters of life → the appropriate focus for a dividend investor is 80% Full-time Job/Family, 20% investing. You cannot invest well without earning well and becoming rich with no loved ones to spend it on is simply earning a banal existence beyond establishing your own pleasures. Cherish the time you have with your family – unlike wealth, you don’t get to compound time. 

#6 – Personal Opinion: Dividend Investing Is Best Approached with a Barbell Strategy

I don’t currently run the dividend investing approach, but if I did do it for a fund in the future, here’s how I would structure it.

The 90%

The dividend portfolio is meant to be invested in the highest grade, safest, most undervalued, yet dividend producing assets you can find in the market. This is a mix of business trusts, banks, REITs, you name it.

The 10%

This is the insurance part of your portfolio, where you basically make a hell lot of money if the markets take a shit and dies tomorrow going through a parabolic drop. Dividend investing is all risk. You’re assuming risk being in the markets, so if that’s the case, its always good to protect your downside.

How to insure your portfolio?

  • Sell 1 Out Of the Money Call on the VIX
  • And use that Premium to Buy 2 further Out of the Money calls on the VIX

The idea is that this trade has three characteristics:

  1. This transaction is either credit neutral or credit positive, meaning it either makes you a tiny bit of money, or it doesn’t cost you money, overall, it drags on your portfolio a little bit, but it doesn’t hurt you a lot.
  2. You lose a little money if something small happens to drive volatility up.
  3. You make a ton of money if markets crashes or spikes up crazily.

The VIX call manoeuvre here is basically a page I stole out crisis alpha fund approaches – otherwise known as how to make a hell lot of money when markets go through sudden massive drops.

The important part of this is to realise that as a dividend investor, you need to protect your capital, you need to protect it with as little cost as possible, and if markets do head down massively, you need to be able to stay retired – meaning the insurance should pay off massively and cover potential losses in the markets.

What does all of this mean? It means you get to sleep at night well while churning out dividends steadily.

I hope this has been informative for you.

If you’d like to find out how we would run a dividend investing portfolio, feel free to register for a seat here.

Otherwise, stay safe!

Irving Soh
Irving Soh
Behavioural Psychology fanatic. I like good food, movies, intelligent conversations and logical reasoning. I also dabble with options, factor-based investing, and data analytics.
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2 thoughts on “5 Dividend Investing Truths You Need to Know (and a Bonus Segment on how to protect your portfolio from market meltdowns)”

  1. You used abbreviations and there is no explanation against each, assuming your readers will understand. Unfortunately I am not very intelligent. I guessed but won’t assume I was correct. Perhaps you would enlighten what is TTM and VIX

    Reply
    • hi, TTM is trailing twelve months. VIX is the volatility index. The volatility index is best known as the fear index, and it gaps up when there’s a market meltdown or whenever prices swing alot (either up or down, but down is more drastic than up most of the time). So when you buy calls on the VIX, you’re saying you get to buy VIX at a set price by a set time, and if a recession happens, you get to buy it cheap and sell off the position to cover any losses the real portfolio might have suffered.

      Reply

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