Here’s an excerpt from the podcast:
Andrea Heng:
So when I invest in a dividend stock, I would expect some returns. So when is payday for dividend investors, and how are they paid out?
Abel Lim:
Okay it varies, again from company to company, industry to industry as well. So dividends can come in the form of quarterly, half-annually, or even annually. So it really depends on the board of directors within the said company, and their normal practices. So typically we see companies actually pay out on an annual basis, and this money paid out in various form. It can be in the form of cash, so it’s a direct credit into your account. Conversely, you can be paid via more shares. And if you’re paid more shares, you can either sell those shares for money or for the long term investor, reinvest it. So the best way, if you have a long term horizon, reinvest the money. Because the moment you reinvest the money, you actually invoke the eighth wonder of the world.
Andrea Heng:
The eighth wonder of the world? Tell me more.
Abel Lim:
The eighth wonder of the world is the power of compounding. So when you reinvest your money, you reinvest the share into the company, you create two streams of income – the natural income which is the dividend payout. But because of the fact that you are reinvesting it, you’re earning interest upon that interest, or dividend upon dividend.
Andrea Heng:
So it’s really a good strategy to have it stacked on to each other so that you’re just maximising your returns … So can a company decide to cut dividends and in some cases, not even pay out at all?
Abel Lim:
Yes, a company can do that. It’s within their jurisdiction. But typically when a company chooses to dial down or to cut dividends, it’s usually a pretty bad sign, that the company isn’t performing particularly as well. There are certain challenges that they are gathering sufficient ammunition to meet, and these are typically not (an) ideal situation for a company to be in. So the news that goes out into the industry or to the markets tend to be pretty negative when a company does cut or stop dividends. That’s also one of the reasons why a lot of these dividends are moderated in the onset, so that it doesn’t send out the wrong signal.
