Dividend investing is an excellent way to create an additional income stream and diversify your portfolio. Your next challenge: you now need to determine where your newfound income will be channeled towards.
Crafting the ideal investment portfolio is akin to a delicate balancing act. Not only do you have to ensure that your assets aren’t concentrated in a single industry or nation, you also need a good mix of growing and established businesses. Another rule of thumb is to invest for the long-term, especially if you’re a working professional who’s constantly strapped for time.
Enter dividend investing. Referring to a strategy of purchasing stocks that pay out a portion of their company’s profits to shareholders regularly, be it in the form of cash or shares, dividend investing lets you kill multiple birds with one stone.
For example, multinational tech conglomerate Cisco saw its stock price grow steadily from January 2011 to 2021 (US$20.73 to US$43.35). Concurrently, its dividend yield increased more than six-fold in the same timeframe.
Adopting this strategy allows you to diversify your portfolio by hedging against more volatile assets you have while creating an additional income stream. But with great money comes great responsibility, fortunately or otherwise. Here are 5 channels where you can direct your newfound income towards.
(Note: Don’t go all in on the final one, though.)
1. Contribute to your CPF accounts
Here’s your chance to kill even more birds with said stone. By redirecting your dividends towards your CPF-SA or CPF-RA, you’re given assurance that your retirement needs are well-met. Remember, these accounts are guaranteed to generate interest annually, so your funds aren’t dead in the water.
The second bird you kill here would be tax. You’re granted a personal income tax relief that matches every dollar voluntarily contributed to you or your family’s CPF-SA or CPF-RA. Although this is capped at S$7,000 for your personal accounts and S$7,000 for your family members, a S$14,000 personal income tax relief is still nothing to scoff at.
The dividends you receive can be channelled back to your investment war chest. Having a larger capital on hand allows you to invest in riskier assets or simply purchase securities that were priced out of your reach previously. Having a larger investment capital also gives you greater peace of mind, especially when a market downturn catches you off guard.
A word of caution, however. You should not re-invest solely in dividend stocks because companies can adjust their payouts on a whim. After all, dividends are derived from an organisation’s profits and if business is poor, expect them to start cutting you out of the equation.
3. Make a donation
On the surface, making a donation using your dividends isn’t exactly ideal. Instead of re-investing the money, saving it, or doing something nice for your loved ones, you’re giving it away in the hope that it will help further a charitable cause. On the other hand, there is a compelling reason why you should donate your dividends: tax relief.
To be precise, you’ll receive a 250% tax deduction for cash donations made to approved Institutions of a Public Character. With over 600 IPC-approved charities across 14 sectors, there’s definitely one with a cause that you can get behind.
Do note that the annual tax relief you’re entitled to is capped at S$80,000.
4. Bid farewell to debt
Loans are an unavoidable part of life. If you’re buying a house, you’d need a home loan to finance the purchase. Looking to scoot around town in style? Car loan it is. Heading back to school? Better start studying those education loans first. Fortunately, your dividends from investing can go towards repaying the loans that you have taken up or will take up.
For instance, a monthly home loan repayment of S$2,000 can be offset entirely by a portfolio size of S$480,000 generating a 5% dividend yield. Admittedly, that’s not the easiest ask for younger couples who are only several years into climbing the career ladder.
A more realistic method would be crafting a portfolio of S$200,000 that generates a 6% dividend yield. This halves the monthly repayment and will take a huge load off anyone’s shoulders.
5. Treat yourself
For most, wealth accumulation is a means to an end. Whether it’s for a worry-free retirement or a trip around the world that’ll turn Jules Verne green with envy, there’s always a goal in mind. Since dividend stocks are securities that reward you with an almost guaranteed payout annually, you should use some of that cash to treat yourself.
To make your money’s worth, take advantage of memberships that grant you additional perks while you’re out shopping, dining, or just unwinding. And to generate even more value out of what you spend on while resting and relaxing, use the appropriate credit card for maximum cashback or miles.
Thanks to the power of compounding, there’s no better time to start investing than the present. With dividend investing, this rings true twice over since you have both stocks on hand and a passive stream of income. However, you now need to exercise greater responsibility lest you overspend and render your dividends moot.
The aforementioned five channels that your newfound passive income stream can go towards ensure your investment efforts and financial discipline are paid off in full, and then some. Because who doesn’t enjoy a reward after working hard?
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