3 Reasons Why Value Investing is So Powerful
1. High Dividend Income and Capital Gain.
Investing in great businesses at undervalued and fair value prices provides high dividend and capital gain.
Some has suggested that it is difficult to sustain a living based on dividends alone because you need a large amount of capital to invest. Their argument typically goes like this: “If you need $50,000 annually and your dividend yield is about 5%, then you’d need $1m in capital to invest.”
This is a very narrow and short-term view of looking at investing. My personal experience reveals a very different perspective. If you invest in a great business at a grossly undervalued price during a crisis, your dividend yield is going to grow tremendously over time.
in 2003, I purchased SGX (Singapore Stock Exchange) at about $1.60/share. I valued SGX at $4-$5 then. The dividend was only $0.05 per share, which meant the dividend yield was about 3%. Yes, a small yield but just nice enough to offset inflation.
SGX continued to grow and in early 2007, its stock price reached $7.50-$8. They also announced a dividend of $0.35/share. The dividend yield based on SGX’s 2007 price was 4.4%. Again, just nice to offset inflation, right?
But wait! At what price did I purchase SGX for in 2003? $1.60. $0.35/$1.60 = 22% dividend yield! I have not even factored in my capital gains. So what would happen when I reinvest my dividend income? I get even more dividends next year (which I continue to reinvest) and compounding return will work its wonder. Pretty soon, you can achieve more than 100% returns from just dividends alone.
Some of my recent dividend yields are between 10%-14.5% and they continue to grow. I know of investors who have a 40% dividend yield for certain stocks they own, which means they only took 2.5 years to breakeven on their initial capital!
2. Pure Passive Income
When I posted some of my dividend cheques online, someone private messaged me asking whether I am interested in other streams of passive income like MLM.
Let me be very clear — passive income to me means my one-time effort providing continuous income for years to come. I love value investing because there are no down-line recruitments, no meetings, no software, no active trading, no charts, no monitoring of stock screens.
I just stay at home and collect cheques from great companies while watching their value grow. MLM is not a passive income business, it merely provides a residual income stream. Trading is making a living. If you want to build wealth, invest. In you want to build wealth massively, value invest.
3. Tax Free or Only Tier 1 Tax Structure
In Singapore and Malaysia, both capital gains from stock/equity investing and dividends are tax free (especially for Real Estate Investment Trusts).
Investing in a great business at an undervalued price is like buying a golden goose that will lay golden eggs for you continuously over time. The question is whether you have the right investing knowledge, emotional stability and patience to let it grow