Strategy: The Real Life Example

If you had invested MYR150,000 in 10,000 shares of Dutch Lady Milk Industries Berhad ("DLADY" BURSA:3026) back in Year 2000 at its highest price of that year MYR15.00, you would have received a total of MYR668,540 dividend income for the past 16 years.

Yes, you read it correct. For an initial investment of MYR150,000 in Year 2000, you received MYR668,500 net dividend income over last 16 years.

Source: Bursa Malaysia Listed Companies announcements
Your dividend income for the last three years would have been MYR88,000 per annum or about MYR7,333 per month. Not a bad income for retirement.

Earnings of the company has been growing at average 15.5% annually for the past 16 years allowing the dividend to grow. The annual dividend payments are expected to continue to grow for years to come as long as the company is still growing.

Investing in such dividend growth stocks like DLady is one of the best ways to build passive income for retirement. There were a handful of stocks listed in Bursa Malaysia other than DLady that delivered such, if not more, lucrative returns over a long period of time.

Oh, by the way, DLady's share price for the last few months hovered around MYR54.00. The MYR150,000 investment in Year 2000 would have now worth MYR2.16 million on top of the dividend income. Anyway, this is not important as you could enjoy the profit only after you sell the shares and give up future income.

Strategy: In Perspective

I did a calculation for my friend who wants to have monthly passive income of MYR10,000 (MYR120,000 annual passive income) after his retirement.

If he were to retire today, to have an annual income of MYR120,000, he needs to invest MYR2.4 million in stocks with average 5.0% dividend yield. There are a few stocks currently my friend can buy to retire with annual income of MYR120,000. Here are a few examples listed below.

The above list of stocks show that the investment cost of having MYR120,000 annual dividend income ranged between MYR2.2 million to MYR3.1 million depending on dividend yield.

The investment cost for MYR120,000 dividend income is big. However, his investment could have been reduced significantly if he invested in dividend growth stocks 15 years earlier. I take DLady as an example below. If my friend invested MYR206,250 in 13,750 shares of DLady 16 years ago in Year 2000, today he would have owned 55,000 shares of DLady earning him MYR121,000 annual dividend income.

If he were to continue to work for the next 15 years before his retirement, he merely need to invest MYR370,000 in stocks with 4% dividend yield today and 15% average annual growth for the next 15 years.

The initial investment amount gets smaller if he allows longer period like 20 years for the dividend to grow.

Of course, the key is therefore which stocks should we invested today that will bring us a long term growth.

Strategy: 3 Areas

A) Stock Selections: Pick the right stocks/ businesses
  1. Good earnings growth. Target minimum annual growth of 12%;
  2. High profit margin. It depends on industry.
  3. Positive cash flow. The company generates real hard cash profit and not paper profit;
  4. Cash rich. Net cash positions, i.e. cash in banks is more than short term and long term borrowings;
  5. Strong balance sheet. It means low or no borrowings, low debtor, inventory & creditor, low intangible assets (goodwill, deferred tax, etc.) and low fixed assets. The company should generate a lot of cash and pay dividend while growing;
  6. Good dividend growth. Consistent dividend payout ratio from growing earnings
In summary, select stocks with high potential upside, limited downside and give dividends while we are waiting for them to grow. The selection criteria has to be stringent because even Warren Buffett has limited cash. We should use our limited cash to buy only the best. Don't waste your money investing in stocks that you cannot be reasonably sure of their future growth.

B) Stock Valuation: Buy and sell at the right price

It is not enough to just invest in the right companies. We must buy them at the right prices.

There are a few ways to evaluate value of a stocks.
  1. Price-Earnings Ratio (PE Ratio) = Price/ Earnings Per Share ("EPS")
  2. Dividend yield = Dividend Per Share ("DPS")/ Earnings Per Share ("EPS")
  3. Anticipated growth in % or using Price/Earnings to Growth Ratio ("PEG")
  4. Discounted cash flow ("DCF")

To be continue...

Rough structure below C) Cash management
Time is crucial in investing. Monitor 15 good companies. Buy only when valuation is right. Invest only with the money that you can hold long enough for your strategy to bear fruit.