What Can A Dividend Portfolio Do For Me?

I made a call last week that the sell-off in the European markets had been overdone, and that markets had "speculatively priced in the problems of the future while forgoing the facts of today". As trading opens this week, I believe that markets have become much more sensible following the ECB's most robust stimulus package yet, with indices climbing all around. 

With this in mind, global markets are still recovering (at best), and the outlook is still shaky. Perhaps now's a good time to start thinking about potential investments that can provide both safety and moderate growth over the long term. By that, I mean a diversified dividend portfolio. 

A Local Diversified Dividend Portfolio

Dividend portfolios tend to provide higher absolute returns than Growth portfolios in weak market environments, and can potentially even outstrip Growth portfolios' risk-adjusted returns in strong markets. More importantly for us as retail investors, we get to collect regular distributions of cash throughout our investment holding periods which we can use to reinvest or, of course, enjoy.

To keep things simple, the portfolio I have constructed consists of stocks which we can easily purchase off the local wet market (SGX). The asset allocation looks like this:

Most of the constituents of this portfolio come from the Straits Times Index (STI), and while not all have mandated/official dividend policies, the companies have been regularly paying dividends over the past 5 years. 

From my previous post, we know that the total returns on an investment includes both the capital gains (from the stock price moving up) and dividends (click here to view that post). Now, just by comparing capital gains alone, the portfolio outperformed the STI by 17.21% over the past 5 years. 

Once we take dividends into account, the spread it earns over the STI increases to a whopping 59.65% (the portfolio's total absolute returns are 46.80% versus the STI's -12.85%). This translates into a very comfortable Compound Annual Growth Rate (CAGR) of 7.98% over the 5 years. To make things even better, this illustration does not even take into account a reinvestment of the dividends earned.

Putting things into perspective, here's the dividend portfolio's CAGR against a couple of key interest rates currently applicable here in Singapore:

For those of us who might not be as savvy or interested financially, perhaps one could consider passively investing. This would simply require us to purchase shares of stocks at regular intervals and at predetermined proportions. It might be tough getting started, but think about the long term benefits. Every $100,000 invested today that grows by 7.98% per year over the next 25 years would grow to more than $680,000 - that's 5.8x more than the value it is today.

Time is our friend, and no matter which field of work or study we are in, we cannot deny the compounding strength of time and investments which will one day lift the financial burden off our shoulders.