It is better to invest in a portfolio of dividend paying stocks.
You are below 40, married, maybe have a child. You have a stable job. Your income is quite sufficient to take care of your EMI and still have significant surplus cash flows. The surplus money keeps lying in your salary account. Once in a while you get around to it and make an online fixed deposit. Your banker keeps trying to sell you insurance plans. Of course, not the term plans, though. However, you know better and somehow have been able to fob him off until now. He will definitely get to you some day; but that doesn’t concern us right now.
You have consulted a financial planner and have been advised to allocate somewhere between 50% to 70% to equities from your existing fixed deposit allocations. You agree with this advise and want to implement it. The planner has risk profiled you and told you that your risk capacity is high. This means that your age, job, liabilities, financial and family situation allows you to take large risks. But your risk appetite is low. Your willingness to accept risk is low. You can take a lot of risk but are not willing to take it. You also agree with the financial planner that you need to take the risk to reach your future financial goals. However, you do not feel comfortable doing it.
So far you have not allocated to equities at all. Every time you meet your financial planner you agree with him that you need to allocate to equities. You also know that you have to take this risk and you don’t need the money for a more than 5 years, probably for decades. You decide to take face the fear.
The best way to handle fear is to understand it. Where is it coming from? What is the quantum? What is the worst that can happen? You know that equities are risky. You start learning about the markets. You learn that markets can crash around 10% once every year. The markets can crash around 20% once every 3 years or so. The markets can crash 30% once every decade. The markets can crash 50% to 70% once or twice in a lifetime. You also learn that many stocks go to ZERO. Initially, this increases your fear.
Then you also learn from the S&P BSE Sensex Index fact sheet (March 31, 2021) that Sensex started on April 3, 1979 with a value of 100 and ended 42 years later at 49509. This is a 16% CAGR (compounded annual growth rate). However, you also learn that this doesn’t include dividends. Dividends were over and above this.
The fact sheet gives the Sensex Total Return Index value at 73262. This is the Sensex index which includes the dividends and reinvests them. This is a CAGR of 17%.
Without dividends Sensex has multiplied by nearly 500 times and with dividends more than 700 times! With dividends the total wealth created by Sensex is nearly 50% higher! And this is with just 1% dividends. In short you realize that:
Equities are powerful wealth creators over time!
Dividends reinvested are even more powerful!
Now your need to start investing in equities is strong. You want to allocate to equities. Definitely not all of it. But start with baby steps. You need to allocate 70% to equities. But you decide to start with 5%. You will watch it for some time. You plan to understand more about stocks with this allocation. And then increase the allocations gradually until you reach your required allocation. You know that swimming cannot be learnt on YouTube. You need to get inside the pool. Maybe at the shallow end. And yes, with a coach advising you.
Now that the decision to allocate to equities is made. What would you invest in?
You think about it and realize that if the companies are good, dividends keep coming to you whether market is up or down. Of course, you understand that companies can stop paying dividends or might pay lower dividends in some years. So you don’t want to invest in a single dividend paying stock. It is better to invest in a portfolio of dividend paying stocks.
You remember coming across this article which talked about Omni Super Dividend which has 8 companies and has a current yield of more than 8%. Is it really possible to get higher yield from a dividend portfolio as compared to fixed deposits? You decide to learn more about it and read the research report mentioned, “Dividends are Divine in a ZIRP World-Generating Higher Income with Investment Grade Equity – AAA rated companies”.
Congratulations! You have started on your wealth creation journey.
Remember the old Lao Tzu saying: The journey of a thousand miles begins with a single step.
Disclaimer: Equity investments are subject to market risks. Global investments entail currency and country risks. The above is not a recommendation to buy, sell or hold any of the stocks or sectors mentioned. We and our clients might have exposure to the above-mentioned stocks or sectors. Please consult your investment advisor and assess the suitability of investment products for your circumstances before investing. Please read the detailed disclaimer on omnisciencecapital.com/disclaimer.
[This is an authored article by Dr. Vikas V Gupta, CEO & Chief Investment Strategist at OmniScience Capital. All views, opinions and expressions are personal and limited to the author.]