Magic Formula to Double Our Investment Portfolio

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.