Dividends are rebates rather Interest payments, however, many investors treat dividends as a form of regular income. While this can be assumed as such during good times, it is hardly the case during market downturns and prolonged bear markets. This is because even cash-rich companies will usually conserve cash by distributing little to no dividends during such times, causing investors who rely on dividend payouts to suffer a dip in income. That is why it is advisable to treat dividends as rebates rather than “interest payouts.” During this pandemic, many stock counters on STI have suffered a significant drop in share prices. While this is bad for existing shareholders, it is not as bad a situation for investors who are intending to invest in them because a cheaper share price is like a discount. In this week’s post, we are going to explore the reasons why current discounts are better than the previous year’s dividend payouts.

It takes years to accumulate dividends to arrive at a lower entry price

Investors are often referred to as patient and farsighted people. A big part of that patience and farsightedness is associated with dividend investors who have managed to get back more than their original investments from dividends. As shown in the table below, you will notice that it is possible to get back more than 100% of your capital while retaining the same amount of shares invested years ago.

Basing on a 12 cent annual dividend, you will be able to recover your initial capital after 25 years. This is a typical example of a 4% dividend-paying investment. Essentially, you would have attained free dividends for the rest of your life and 100% profit when you eventually sell it. To bring it back to the topic, you would have shorten the time taken before you can get free dividends (and 100% sales profit) when you buy stocks at a discount.

Dividends are not guaranteed nor is it a contractual obligation

Some stocks are well known for their consistent dividend-paying track record. However, during the recent pandemic, many companies have reduced their dividends or even skipped the annual cycle to conserve cash. As shown in the table above, Singtel has reduced its dividend payouts this year due to the impact of the pandemic on its businesses. This results in price dipping because traders aren’t able to make swing trades with such counters but there comes an opportunity to buy the stock at a discount. Sometimes, the discounts will be more than the expected dividends this making it an immediate deal which you should not reject.

Discounts increases likelihood of higher yields when market recovers

Dividends are not tagged to your entry price whereas it is uniform for all shareholders. What this means is that you might have bought the same counter at different times of the year using DCA and accumulated 10,000 shares in total. Regardless of the entry price of each purchase, the dividends that you will be entitled to are the same. Hence regardless of your investment style, buying at a lower entry price would always benefit you in the long run especially if you are a dividend investor.

Closing Thoughts

The main purpose of this post is to inform and share the warped logic of investing around the world. If you notice, people will usually be less willing to buy at a lower price and less dividend announced as compared to a much higher price with a higher dividend announced that year. As shown above, buying at a discount presents way more benefits both immediately (lower capital commitment) as well as potentially higher yield when dividends reverts. As such, I would encourage investors especially those who intend to invest in the long run, to accumulate dividend-paying stocks with a healthy track record during this downturn. Practicing DCA now would be much wiser than when the market has partially or fully recovered. By then, share prices would have gone up and the yields that you will be getting would have been discounted instead.