What is a better choice? Choosing capital gains or dividend paying investment? A 21 year old wondering what to do with 10k sitting in his bank.? - Seedly
 

AMA SG Young Investment

Investments

Asked by ZH AhHeng

Asked on 07 Sep 2018

What is a better choice? Choosing capital gains or dividend paying investment? A 21 year old wondering what to do with 10k sitting in his bank.?

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Qs: Choosing capital gains or dividend paying investment?

Short Answer is to pay yourself first.

The correct mindset is important and having a Safety of Margin is important.

By getting sustainable dividend with low payout ratio will give you the cushion and time to wait for capital gains if the Business is a Growing Business.

If i getting 50 votes for this reply, I will give a longer answer.

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Jay Liu
Jay Liu, Diploma in Accountancy at KHEA
Level 7. Grand Master
Answered on 15 Sep 2018

Depends. Since you are 21, will you be taking on study loans in the near future for your studies? If yes, better to just park that 10k in safer products like cimb fastsaver or SSB. If its a no, you can try to invest in those 2. Depends on your risk appetite.

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Hao Yu
Hao Yu
Level 4. Prodigy
Answered on 08 Sep 2018

Just to set the stage right, I am assuming you are talking about equities only. For all equities, they generally have both capital gains and dividends

Total Returns = Capital Gains + Dividend Yield

To decide which type of investments to go for, you need to consider what’s the

purpose of investing this sum of money?

If its to help you build a passive income stream to sustain a certain kind of lifestyle in the near future, I would say income-driven investments where most of your returns are coming from dividend.

If you have no need for the passive income so early in your life, capital gains is what I will suggest. The reason is because if you have no use for the passive income, you will either be spending it unneccesarily or reinvesting. Reinvestment will lead to risk such as inavility to generate the same type of returns had you went for a growth driven strategy, lack of discipline to reinvest etc.

Other considerations in determining your investment strategy:

  1. How long is your investment period?

This is in relation to your answer to the first question. In general, the longer your investment period, the more risk you can take because you will have more to recover in the event of a market decline.

  1. How willing are you to take risk?

This depends on your reaction towards market volatility. If you’re those that cannot sleep when market is volatile, go for a safer asset class like Singapore savings bonds. If you’re a super aggressive investor, you can go for risky asset class.

Last but not least, if you notice, most of my points are about risk and not returns. This is because investment should have a hevat emphasis about managing your risk to get the risk adjusted return you need. Returns will come with due diligence in managing your risks properly. You can simply get super high returns by taking a lot of excessive risk. (but is it worth losing all your money?)

There are many other considerations but those are discussion for another day haha hope this helps :)

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Jeff Yeo
Jeff Yeo, amateur Social contributor at School of social sharing
Level 7. Grand Master
Answered on 15 Sep 2018

I think it is better to buy a stable blue chip stock that pays out constant dividen. If the company’s business is sound the stock will also appreciate over time.

smaller companies might have bigger chance of higher growth with capital appreciation however You Have to do quite a bit of research.

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Good Day Every Day
Good Day Every Day
Level 7. Grand Master
Answered on 15 Sep 2018

Go for both if you can. Invest in value stocks for capital gains and dividend. But do your homework.

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HC Tang
HC Tang, Financial Enthusiast, Budgeting at The Society
Level 8. Wizard
Answered on 15 Sep 2018

As you are young with 10k capital for investment, thus you need to increase your capital to reach a scale for more sizable returns.

Therefore, now go for capital gains to accumulate your war chest.

After you have work and financial plan monthly with savings for emergency and investment and you would want to retire early, or simply do not want to depends on a salary for living for long, then switch to

dividend Investing.

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Lee Jiahui
Lee Jiahui
Level 6. Master
Answered on 14 Sep 2018

Capital gain happens when the company's profit increases, which usually translate to higher dividends. Regardless of age, when evaluating a company, you need to seek capital gain potential else dividends will fall when profits fall.

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Chen Zhirong
Chen Zhirong
Level 5. Genius
Answered on 14 Sep 2018

Capital gains but from what I understand, unless you're willing to put in the effort to chase annual reports and read analyses, it is hard to find stocks in SG that have capital gains. These tends to be pretty small companies!

So I would say depends more on the time you're willing to invest, not just the cash!

Would honestly rather put that first 10k in an ETF to work while I read up, even if i'm keen on capital gains.

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Since you are young, you should definitely go for capital gains in my opinion. Once you have a good amount of capital you can change your portfolio into dividend paying and retire early using dividends for expenses

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Dwivid Sharma
Dwivid Sharma
Level 5. Genius
Updated on 07 Jun 2019

I follow the golden rule of Warren Buffet that "Never put all eggs in one basket". That's why I would love to suggest you to put 5k in capital gains and 5k in dividend paying investment.

Moreover you can also try for REIT's, a good REIT provides you more than 50% return of investment. chech out my post https://seedly.sg/questions/what-are-the-key-criteria-for-evaluating-reits

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Hao Yu
Hao Yu

08 Sep 2018

Hi Dwivid, I believe you’re talking about diversification of investment. Just to add on to your point, I feel that diversification is not just about splitting money between two types of investment strategy. We have to also consider the nature of the underlying assets and its correlation to have good diversification. Splitting money between two strategies with assets with strong/positive correlation will not lead to a diversification benefit. Cheers!
Dwivid Sharma
Dwivid Sharma

14 Sep 2018

Hi Hao Yu, thanks for adding on me. I am agree with you point of view.