The Magic of Compounding Dividends

Lately, I did some reading on retiring in Malaysia. From which, I discovered:

  1. One in three Malaysians don’t have a savings account.
  2. 86% of Malaysian urban households do not have savings.
  3. 68% of EPF members aged 54 had savings amounting below RM 50,000.

Extracted from ‘Malaysians not saving enough for retirement’, The Star Online dated May 4, 2016

It’s a shocking revelation.

Clearly, it is a calling for all to assess our current financial positions and to plan ahead for our retirement.

Since 2011, the EPF has achieved commendable financial results and thus, enabling dividend payouts of above 6% a year. However, with continual rise in living costs, I believe we need to do more for ourselves than just placing money into our EPF accounts.

Let us assume. If you are 25 years old and have just landed your first job, how would you prepare for your retirement?

1. Start a Part-Time Business?
(Great idea especially if you are enterprising, driven and have the persistency to work it out. Your small business could be grown into a multi-million dollar empire.)

2. Invest in Properties
(Great idea if you have large amount of capital or if your parents are willing to ‘donate’ the down payment for your property.)

3. Invest in Stocks
(Great idea for people starting off with lower capital. Need time to learn, practise and master investing skills to boost success.)

In the absence of business ideas and huge capital, I believe many would choose to start by investing in the stock market with intentions to achieve both capital appreciation and dividend yields.

The magic of compounding dividend

Thus, I’ve decided to build simulations to find out whether one can retire comfortably through stock investing. This simulation assumes the following:

  1. Invest solely to achieve 6% in Dividend Yields a year.
  2. Dividends received are to be reinvested back to achieve 6% in Dividend Yields a year.
  3. Hold stocks over the Long-Term (With Little or No Short-Term Trading).

Investor A

  • Age: 25
  • Invest RM 10,000 a year until age 55.

Figures in RM

PeriodTotal New Capital InvestedTotal Dividends ReinvestedTotal Accumulated AmountDividends At Age 55
30 years300,000538,017838,01750,281

 

Notes:

  1. Investor A has invested a total of RM 300,000 in new capital into stocks that pay above 6% in dividend yields.
  2. During the 30-year period, Investor A would receive a total of RM 538,017 in dividends. From which, Investor A has chosen to reinvest them back into stocks that pay above 6% in dividend yields.
  3. In total, Investor A would have accumulated RM 838,017 by age 54.
  4. At 6% dividends, he would collect RM 50,281 in dividends. This works out to be RM 4,190 in monthly income to fund his retirement.

Investor B

  • Age: 35
  • Invest RM 10,000 a year until age 55

What if you’ve realised the power of compounding dividends later than Investor A?
Figures in RM

PeriodTotal New Capital InvestedTotal Dividends ReinvestedTotal Accumulated AmountDividends At Age 55
20 years200,000189,927389,92723,396

Notes:

  1. Investor B has invested a total of RM 200,000 in new capital into stocks that pay above 6% in dividend yields.
  2. During the 20-year period, Investor A would receive a total of RM 189,927 in dividends. From which, Investor B has chosen to reinvest them back into stocks that pay above 6% in dividend yields.
  3. In total, Investor B would have accumulated RM 389,927 by age 55.
  4. At 6% dividends, he would collect RM 23,396 in dividends. This works out to be RM 1,949 in monthly income to fund his retirement.

Clearly, there is a clear distinction between Investor A and Investor B. The magic of compounding dividends works in favour of investors who appreciate the wisdom and decide to invest early.

However, you may wonder, ‘What if, at age 35, I decide to invest more than RM 10,000 a year. Does it help to catch up years of not being invested?’ It seems logical. After all, most would have more income as a result of job promotion.

Thus, here’s a simulation of Investor C.

Investor C

  • Age: 35
  • Invest RM 20,000 a year until age 55

Figures in RM

PeriodTotal New Capital InvestedTotal Dividends ReinvestedTotal Accumulated AmountDividends At Age 55
20 years400,000378,039778,03946,682

Investor C has invested a total of RM 400,000 in new capital into stocks that pay above 6% in dividend yields.Notes:

  1. During the 20-year period, Investor A would receive a total of RM 378,039 in dividends. From which, Investor B has chosen to reinvest them back into stocks that pay above 6% in dividend yields.
  2. In total, Investor B would have invested RM 778,039 by age 55.
  3. At 6% dividends, he would collect RM 46,682 in dividends. This works out to be RM 3,890 in monthly income to fund his retirement.

Still, despite investing more, Investor A would derive more dividends than Investor C when they hit age 55. This is because Investor A has started investing earlier than Investor C.

And, that is the ‘Magically Power of Compounding Dividends’.

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