Investing for dividend income

IN investing, investors look for returns on their investment. Some asset classes provide only interest or dividend return.

For example, a person puts her RM100,000 in a bank’s fixed deposit (FD) for a year at three per cent interest. At the end of the period, she will get RM3,000 as the interest earned. Her principal is still RM100,000.

In another simple example, a person who has RM100,000 in his Employee’ Provident Fund (EPF) at the beginning of the year will receive dividend at the end of the calendar year.

Let’s say the dividend rate declared is 5.5 per cent, then this EPF member will see RM105,500 in his account at the end of the year. The RM5,500 is the dividend income, while the principal amount is still RM100,000.

In some other asset classes, the investor has the opportunity to gain from capital appreciation, on top of the dividend income.

For example, an investor purchases an apartment in Kuching for RM225,000. She rents the apartment and receives gross monthly rental income RM1,200.

She pays RM107 every month for the apartment monthly service charge.Lets assume that she could rent out the apartment for 9 out of 12 months in a year and incurs expenses of RM50 per month on top of RM107 monthly service charge.

To calculate returns of her property from rental income, RM1,200 minus RM157 equals RM1,043. This value times nine months equals RM9,387, and divided by the purchase price of RM225,000 equals 4.2 per cent. This looks quite reasonable for a residential property in Kuching.

On top of that, when the apartment value increases over medium to long term, she will enjoy some capital appreciation. The potential for capital appreciation depends on multiple factors, including but not limited to the demand from the rental market, location, quality of the apartment and more importantly, the supply of new apartments in that area.

The above is just a straightforward example which does not include the acquisition costs of the apartment such as legal fee and stamp duties incurred; as well the additional neglected cost of transfer fee and stamp duty to be incurred when the strata title is issued.

However, property investment may not be everyone’s preference as it is a chunky asset and it is illiquid, meaning the investor will not be able to convert the asset to cash quickly without significant loss of capital. Retirees who look for income in investing

For people who are retiring and have retired, committing too much investment in illiquid assets are problematic. Income should be something you look for and it is ideal if there is an opportunity for capital appreciation to offset the effect of rising Inflation.

Thus you should take a look at something more straight forward and liquid. You can consider dividend income fund offered by licensed unit trust companies.

Before you jump into any unit trust fund that is labeled as a dividend fund or a fund that have declared dividends in the past, do your important research based on the following three points:

1.Does the fund pay out all the dividend incomes it receives?

It is ideal if there is a fund that pay out all the dividends it receives to unit holders, as you will enjoy the maximum dividend income generated. Take note that some funds do not have regular dividend payout policy and only pay out as and when the fund manager decides.

Also it is not very healthy for growth fund to declare regular dividends, as the investment strategy is to invest in stocks with growth potential and not those with high dividends.

2.Does the fund pay out dividends more frequently than just once a year?

It will be ideal if a fund has shorter-term payout window. Half yearly or quarterly is better if you are looking for regular income from your fund investment.

3.Does the fund focus on high dividend stocks?

The fund investment mandate should state that the fund manager must focus on high dividend yield stocks so as to maximize the dividend payouts to investors