Module 5 Part 1/2: Dividend investing

June 17, 2024

Dividend investing!

Welcome to the EasyEquities Mentorship program, where we make investing EASY for you!

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

Lets get into it!

This module will go through the following topics (we will go through the first one in this article):
How dividends can get eaten up by inflation.
Factors to consider

How dividends can get eaten up by inflation

Most investors love dividends. Who wouldnt? It is passive income. Although this is true, investors seem to chase high-yielding stocks to receive as many dividends as possible. Unfortunately, this is simply not a plausible method for dividend investing.

Our main point of emphasis is that buying a stock based purely on dividends is not a viable thing to do. Ideally, we would buy businesses that are growing in the future, have strong balance sheets, and pay increasing dividends.

Instead of buying based on dividends, we are buying based on dividends and the growth of the company that will ultimately translate into capital gains. We will use a hypothetical scenario with British American Tobacco (JSE) and Exxon Mobil Corporation (NYSE).

Let's say that in 2010, you bought both British American Tobacco (BAT) and Exxon (EMC). BAT's share price was R250, and EMC's share price was around $62. We know that British American Tobacco, as well as Exxon both, pay dividends, however, BAT focuses on growth as well.

12 years later, in 2022, BAT is now worth about R685. Your capital gains would be over 170%. On top of that, BAT paid you increasing dividends which you reinvested. So, besides growing through dividends, the actual underlying stock is appreciated.

Lets look at EMC now.
You paid $62 for EMC back in 2010. Over the next 12 years, this stock also paid dividends which you reinvested.
In 2022 the stock is worth about $68 a share. You would have just made money on your initial investment and gained little through dividends which inflation would cancel.

Scenario 1, with British American Tobacco, was a better choice compared to Exxon Mobil Corporations. The lesson here is don't buy simply because "it pays 6% so I'm buying" and instead buy because "this is paying 2% but this business is growing."
12 years later you would have a pile of assets paying you and hopefully, the business has grown which would reflect in the share price.

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