15 March 2012

The Importance of Grow, Dividend, Long Term Period in Stock Market Investment

In any investment, reasonable growing and return are two very crucial benchmarks we should consider about. For stock market investment, the grow can be the grow of a company we have invested. The return should be in terms of dividend for long term investment, generally.

Now, let me give you an example about how grow multiply to dividend equals wealth after few years.

Company A:
Dividend payout 20%,
Growing rate 20%,
Investing period of 5 years,
Entry point is dividend yield (DY) of 5%: Market price: $0.40
EPS of 0.10
Dividend of 0.02

Your Cost of investment: $0.40

Year 1: EPS = $0.10; Dividend = 0.02;
Year 2: EPS = $0.12; Dividend = 0.024;
Year 3: EPS = $0.144; Dividend = 0.0288;
Year 4: EPS = $0.1728; Dividend = 0.03456;
Year 5: EPS = $0.20736; Dividend = 0.041472;

Obviously, as you can see, with the grow of 20% annually, the DY will be 10% after 5 years. It is also worth to highlight that since the company retains 80% of its earning annually, special dividend or bonus also probably will be given during these five years when the company have retained certain amount of capital for future growing.

Without growing, the DY after five years will be the same as the first year. Without dividend, sharesholders cannot enjoy the direct return (dividend) from their investment annually, and if any unfortunately event happens to the company, the retained profts of the company may be gone. Therefore, as an investor, we should always make sure the company we have invested achieves certain level of grow from time to time and return reasonable dividend annually (except some special conditions). In short, I can summarise the content of this article with the following equation:

Grow*Dividend*Time = Shareholders' Wealth Up

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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