Top 3 Challenges with Dividend Investing


Recently, some of my friends have asked me about what type of challenges they may expect with a dividend portfolio. A dividend portfolio in Singapore essentially consists of dividend-paying stocks such as banks (DBS, UOB) and REITs. It is a good and stable way to receive passive income and many people have already adopted this strategy. There are obviously pros and cons of every investing strategy and I would be discussing my top 3 challenges with dividend investing in Singapore. 


1. Investment Capital

The first challenge of dividend investing is you will need to have a substantial amount of starting capital to get significant returns. For example, if your goal is to achieve a passive income of $1000 per month at a 5% yield, you would require an investment portfolio valued at $240, 000. This can be a large amount of money for some people and look intimidating. Thankfully, this is easily manageable with the snowball effect due to the magical powers of compound interest. All you require is patience to allow compound interest to do all the work over time. The returns may seem minuscule and insignificant at the start but it will increase substantially with time. The difficult part is waiting. 


2. Dividend Cuts

The second challenge of dividend investing is when companies cut their dividends. Dividends can be volatile and decrease due to the company performing poorly in a bad economic setting. For example, retail and hospitality REITs have recently cut their dividends due to them being severely affected by the coronavirus pandemic and poor economic outlook. To counter this problem, you can always buy stable blue-chip dividend-paying stocks that have an excellent dividend track record. You can check the dividend history of the company to see if they have a tendency to cut their dividends and avoid including these companies in your portfolio. 


3. Companies Stop Paying Dividends

The last and most significant challenge that you must avoid at all costs is buying companies that may stop paying you dividends in the future. The last thing you would want as a dividend investor is for the company to stop paying you dividends. This would mean you would not receive any passive income and your investment capital is at high risk of liquidating. This is a clear sign that there is something fundamentally very wrong with the company and it is facing serious financial issues. To avoid this problem, you should only purchase stable dividend-paying companies that have a healthy balance sheet and a consistent track record of paying out dividends regularly. You can do your research and only include companies that have a habit of paying out sustainable dividends regularly. This helps to lower your risk of purchasing companies that have a chance of stopping their dividends in the future. 




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