Income from dividends
The interest received on savings is at a record low and yields nothing, we have set up an alternative, a portfolio for the purposes of receiving dividends. The aim is to invest your equity and achieve a stable and attractive income by way of dividend distributions. A dividend return of 8%-10% can certainly be achieved on the basis of this portfolio.
Not many people are aware of the power of compound interest, i.e. the effect of interest-on-interest. The following image shows this effect over a duration of 20 years. It is a comparison between the current interest on savings (1%), and the return achieved on dividends (8%). Other factors, such as inflation and tax, are not taken into consideration.
How is this dividend return achieved?
The equity is invested in shares that are selected on the quality and predictability of the dividend. In order to spread the risk of companies failing, the portfolio consists of 25 different types of companies all over the world, operating in different sectors.
The goal is to achieve a stable cash flow from the invested equity with a possible inflation protection, which means that the equity consisting only of stock listed companies can be subject to heavy fluctuation. This can in some case lead to the halving of the stock exchange rate, even for companies that are regarded as very stable. In the first months of 2009 the stock exchange rates of companies such as Royal Dutch Shell fell by 50% in comparison to the previous year. The dividends, however, remained at the same level, so it did not affect the income, only the value at that moment. After three years, these shares were traded at a stock exchange rate that completely made good for the exchange rate loss.
Achieving a stable income with a portfolio consisting of only stock exchange listed companies is only possible for investors who don't need to withdraw part of the invested capital for the next five years or longer. Substantial exchange rate fluctuations can result in a substantial loss on interim sales.
The return achieved on the exchange rate is an added bonus in addition to the annual dividends. The dividend policy of most shares is aimed at companies increasing their dividends annually, as a correction on the rising inflation.