As a young investor (19 years old), some of us may be enticed by dividend investing. The idea of cash flowing into your pockets because the company is doing well just sounds heavenly. Admittedly, at the start, this is how I perceived it too. Dividend investing seemed like this safe haven where you just collect blue-chip stocks and let the income roll in as time passes. Given that they are blue-chip companies, they are likely to withstand crises… right?
There are a few kinds of investing. They are passive index investing, value investing, growth investing and dividend investing. For some reason, people seem to love the idea of earning passive dividends. I mean, the idea of earning money while you sleep is pretty enticing. But, why does a young investor need such cash flow?
Traits of a young investor
Let us look at some traits of a young investor.
A young investor is probably not very knowledgeable about the market.
In fact, this isn’t a trait of a young investor, it is a trait of most investors in general. We just do not know enough about the market. There are times where you put money into the market in a wimp and miraculously earn profit. Then, you give yourself credit for making the right choice. However, if you really think back about it, it came down to luck.
There are also times where you have done so much research about a company, then you decided it is a good buy. Then you are faced with a sea of red. At that time, you will blame other factors.
We just do not know the market. Nobody really does, in the short run.
A young investor is probably not very experienced in the market.
Since the minimum age to sign up for a broker in Singapore is 18, you definitely had very little time spent in the market. With so little experience, you probably do not have enough tolerance for volatility. In other words, you may say that “I am young therefore I have high risk tolerance”. That is until you have invested a considerable sum of money in the market and see it drop 30%. How would you feel?
To answer that, you will never really know until you try it yourself. As humans, it is very common to panic and begin to question yourself. In fact, you may even have the urge to cut your losses.
A young investor probably has low expenses.
You are young. You have a reason to be broke. Nobody will expect you to have a car at the age of 25. (Bad purchase btw)
Nobody will care whether you are a poor person skimping on food or a baller with 3 Lamborghinis. In fact, if you really want the 3 Lamborghinis, this article isn’t for you. Why bother impressing people you don’t know and you don’t care?
Why a young investor should not invest for dividends
Firstly, dividend investing isn’t safe nor boring. There is always a chance that the firm will cut dividends during bad times. Yes, investing in blue-chip stocks may lower the chance. But, it may still happen.
Secondly, why do you need income? You have low expenses. You probably have low capital as well. Even if you invest your whole net worth in one stock that yields 5%, it will not amount to much either.
Thirdly, in Singapore, investing in US stocks for dividends is a bad idea because of taxes. So you will have to stick to equities listed in the SGX. This will limit your variety of choices.
Update: A user has rightly pointed out that there are in fact other stock exchanges you can look at. Although it can complicate other things, it renders the point above invalid. You will still have a relatively decent variety of businesses to invest in. However, choose the right broker to access such markets! (IBKR or SAXO)
Yes, the idea of passive income sounds good. But why not stick to good old S&P500? It will give you a return of 7% annually. Moreover, as Singaporean investors, we should purchase the Ireland-Domiciled ones. Therefore, you can choose the Accumulating ETFs, and your dividends will be automatically reinvested for you. If you really need the “income”, find a job. If you are really desperate, sell your ETFs (not recommended).
Join my telegram here!