Singaporeans love dividends. It is always reassuring to see a little stream of money going into our accounts every month, without us doing anything. It is no secret that REITs are the most popular investment among Singapore retail investors.
I too liked constant passive income in the beginning and invested in dividend names such as Starhub, Singtel, and Keppel.
After a decade or so, I get the feeling that dividends are a gimmick, or worse, a trap. They attract you in with supposedly guaranteed dividends, but you fall into the trap of a declining share price.
Those names I mentioned have all tanked and have been in a downward spiral for years. There are too many others to mention, including the entire banking industry.
Yes, dividend paying stocks are less volatile than growth stocks. But growth stocks eventually go up. Most dividend paying stocks, especially those that are based in Singapore, eventually go down.
And it comes down to one fundamental reason.
Dividends are often paid because the management is unable to generate a higher return with its cash themselves. In other words, they have no good ideas how to generate new business.
Thus, dividends are paid to shore up their sagging stock prices. To keep it high, they sell their assets or use debt. But any 12 year old can tell what that eventually leads to. A dying business. Most people are foolishly paying high prices for the illusion of stability and safety.
I should expect CEOs like Elon Musk and Lisa Su to generate a higher return than I would myself. Their record of building value is much better than the vast majority of people. Instead of returning cash to me, I much prefer they keep it to grow their business and share price.
An Unreliable and Low-tier Source of Income
Dividends aren’t even a reliable source of income. Stockholders are the lowest on the totem pole, and dividend payouts are the first to be stopped. The banks, bondholders and the remaining employees would still get paid over shareholders. In many situations, stockholders suffer from a double whammy, a cut in dividends and a declining stock price.
Given the choice, I would much prefer being a bondholder over a shareholder. Bondholders are among the first to be compensated. The penalties and reputation loss is much higher if a company chooses not to pay bondholders.
The higher the dividend, the stronger the sense of being a trap. High dividends, especially anything over 5%, is suspicious. No company worth its salt would have to resort to such a high dividend to attract investors.
When can Dividend Investing makes sense?
There is still a place for dividend investing, but its a much smaller role than what people would imagine.
It only sort of makes sense to move into dividend investing in the twilight years. The time you can wait for a share price to recover is much shorter. Compounding doesn’t matter as much anymore, and you simply wish to preserve wealth while getting a little something in return.
But I wouldn’t do dividend investing as most people do. I would avoid buying individual stocks. These are much too risky to rely on for cashflow. The people who relied on HSBC, Singtel, and DBS dividends were badly hit by both falling share prices and dividends.
Instead, I would buy an income or bond ETF. It’s impossible for these to go to zero, and if any one company fails or defaults, its barely felt.
So don’t fall into the trap of dividend investing, especially if you are young. Don’t get tricked by stable cashflow and “passive income”.
It’s comforting and feels good in the short-term. But in the end you would have lost out on compounders and multi-baggers like Apple, Tesla, Amazon, and any other growth stock.
After a lifetime of investing, don’t be left disappointed.