Fancy a formula that will tell you
how many years will it take to double your dividend income? Or double your
investment position?
Say hello to rule of 72. This is a
powerful rule! Let’s find out why..
If your invested company paid
RM0.50 dividend per share this year and based on your purchase cost of RM10 per
share, your passive income or dividend yield will be 5%.
Dividend Yield on Cost= Dividend per Share / Purchase Cost
The company has a track record of
increasing its dividend payout in the past in line with higher profitability
and free cash flow. Assuming 5% dividend growth per year, the dividend per
share will double to RM1 per share in around 14 years time. What does it mean to
us then?
1) Dividend per share doubled in 14
years time. Even if number of shares that you hold remains constant, higher
dividend per share means higher amount of dividend received.
2) If you have accumulated more
shares along the way, the amount of passive income received would have increased
tremendously.
3) When a company pays higher
dividends, most often that not, the share price is likely to have upward
pressure too.
4)
Peace of mind because not many
companies can consistently increase its dividend, you would have likely found a
company with solid fundamentals.
14 years for dividend per share to
double may seem like a long long wait. Assuming a company dividend yield based
on your purchase cost is 4% and dividend paid per share remains UNCHANGED, if
you could earn another 4% return from capital appreciation on yearly basis over
the long term. Your total return average to be 8%, so how many years will it
take to double your investment position?
Yes, 9 years.
If we invest RM100k at the age of
30 and do not bother to invest fresh capital anymore and the portfolio
generates long term average return of a conservative 8%.
At the age of 39- portfolio double
to RM200k
At the age of 48- portfolio double
to RM400k
At the age of 57- portfolio double
to RM800k
So on and so forth, that’s the
power of RM100k in present value terms that could potentially yield much much more
in the future.
What if you top up your
investment consistently along the way?
What if the company
increase its dividend payout? Since we assume dividend paid per share remains
unchanged in the above scenario which is a highly conservative assumption.
What if the company
share price gain more than 4% on a yearly basis?
Dividend Investing + Rule of 72 are definitely a powerful combination
we should keep in mind.
