Maybank DRIP vs Cash Dividends Long-Term Returns. Which Choice is Better?

This gets to the heart of long-term investment strategy. Here’s a detailed breakdown of the choices, the factors influencing them, and what an investor can and cannot control.

Executive Summary: Which Choice is Better?

For a long-term investor not in need of immediate dividend income, enrolling in the Dividend Reinvestment Plan (DRIP) is generally the superior choice for maximizing long-run returns.

The primary reason is the power of compounding. By reinvesting dividends, you purchase more shares, which themselves will generate future dividends, leading to an exponentially growing number of shares over time. This "snowball effect" can significantly enhance total returns compared to taking cash dividends.

However, this is not an absolute rule, and the decision depends on several factors.

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Factors Influencing Long-Term Returns

Here are the key factors that determine whether DRIP or taking cash will yield better returns.

1. Total Return vs. Income

• DRIP Focus: Aims to maximize Total Return (Share Price Appreciation + Reinvested Dividends). Your return is measured by the growth of your total investment value.

• Cash Dividend Focus: Provides a steady Income Stream. Your return is the cash you receive, which you can then spend or reinvest elsewhere (though manually reinvesting small dividends can be inefficient due to fees).

2. Share Price at the Time of Reinvestment (A Critical Factor for DRIP)

This is the most direct variable affecting the DRIP's effectiveness.

• Beneficial Scenario: If the share price is low when the dividend is reinvested, your dividend cash buys more shares. This is like buying at a discount, significantly boosting your long-term compounding.

• Less Beneficial Scenario: If the share price is high, your dividend buys fewer shares. While you still benefit from compounding, the immediate efficiency is lower.

3. Dividend Yield and Growth

• Higher Dividend Yield: A higher yield means more cash is available to reinvest through the DRIP, accelerating the compounding effect.

• Dividend Growth: If Maybank consistently increases its dividends per share, the DRIP becomes even more powerful. Each new dividend is larger than the last, and it's being used to buy even more shares.

4. Long-Term Performance of Maybank

The DRIP strategy is a bet on Maybank's long-term health and growth.

• If Maybank Grows: If the company's earnings, book value, and share price increase over the long run, the DRIP will have generated exceptional returns. You benefit from both the rising share price and the growing number of shares you own.

• If Maybank Stagnates or Declines: The DRIP still provides a "dollar-cost averaging" effect, but the overall returns will be poor. You are essentially doubling down on a poorly performing asset.

5. Transaction Costs and Convenience

• DRIP: Typically offered with little or no brokerage fees or commissions. This allows for 100% of your dividend to be reinvested, which is highly efficient, especially for small investors.

• Taking Cash: If you decide to manually reinvest the cash dividend, you will likely incur standard brokerage fees, which can eat a significant portion of a small dividend payout.

6. Tax Considerations

• In Malaysia, dividends are generally single-tier, meaning they are tax-exempt in the hands of the shareholder. This is a major advantage as it removes the tax drag that investors in other countries face, making DRIP even more attractive. You get to reinvest the full, gross dividend amount.

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Factors Within the Investor's Control

1. The Decision Itself: The choice to enroll in the DRIP or not is the primary controllable factor.

2. Investment Time Horizon: The investor controls their discipline to stay invested for the long term, which is crucial for compounding to work effectively.

3. Alternative Use of Cash: If the investor takes cash, they control whether they spend it or manually reinvest it (either in Maybank or another opportunity). A disciplined investor might manually reinvest if they believe they can get a better return elsewhere.

4. Portfolio Diversification: Taking cash dividends provides flexibility to diversify into other stocks or asset classes, which is a controlled strategic decision to manage risk.

Factors Outside the Investor's Control

1. Maybank's Share Price: The investor cannot control the market price at which the DRIP shares are allotted. This is determined by market forces.

2. Maybank's Future Performance: The long-term success of the company, its profitability, and its ability to maintain or grow dividends are outside the investor's direct control.

3. Market and Economic Conditions: Broader economic trends, interest rates set by Bank Negara, and the performance of the Malaysian stock market (FKLI) will significantly impact Maybank's share price.

4. Maybank's Dividend Policy: The company's board of directors decides the dividend amount and frequency. They can cut, maintain, or increase dividends based on the company's financial situation.

5. DRIP Terms: The specific rules of the DRIP (e.g., any discount offered, the pricing formula) are set by Maybank and its registrars.

Conclusion and Recommendation

For an investor in Maybank who does not need the dividend income and has a long-term view, the DRIP is the recommended and mathematically superior strategy. It harnesses the power of compounding, is cost-effective, and benefits from Malaysia's tax-exempt dividend system.

The primary risk is concentration—by continuously reinvesting in a single company, your portfolio may become over-weighted in Maybank. Therefore, it's wise to periodically review your overall portfolio allocation to ensure it aligns with your risk tolerance.

In short: Set it, forget it (for the long run), and let compounding do the heavy lifting.

The Impact of the Reinvestment of Dividends, one of the most powerful, yet often underestimated engines of wealth creation in investing

Here is a detailed elaboration and summary of Section 5: The Impact of Reinvesting Dividends.

Elaboration of Section 5

This section is dedicated to showcasing one of the most powerful, yet often underestimated, engines of wealth creation in investing: the reinvestment of dividends. It moves beyond theory and uses stark visual data to demonstrate how this single decision can dramatically alter an investor's long-term outcome.

The core argument is presented through a comparison of two investment scenarios:

1. The Two Paths: Reinvesting vs. Taking the Cash
The section is built around a powerful chart that tracks the growth of a $100 investment in the S&P 500 from 1925 onward.

• Path 1 (The Top Line - Dividends Reinvested): This line shows the value of the investment when all dividends received are automatically used to purchase more shares of the stock or fund.

• Path 2 (The Bottom Line - Dividends Not Reinvested): This line shows the value of the investment when dividends are taken as cash and spent, not reinvested.

The visual result is staggering. The gap between the two lines starts small but widens into a chasm over several decades.

2. Understanding the "Why": The Magic of Compounding
The dramatic difference is due to the effect of compound growth.

• Without Reinvestment: Your money grows only based on the price appreciation of the original shares you bought. This is "simple" growth on a single asset.

• With Reinvestment: You are practicing "compound" growth. It works as follows:

  1. You receive a dividend and use it to buy more shares.

  2. You now own more shares. In the next period, you receive dividends on your original shares plus dividends on the new shares you bought with the previous dividends.

  3. This process repeats, creating a snowball effect. Your returns begin to generate their own returns. Over time, this leads to an exponential growth curve, which is what the chart visually depicts.

3. The Critical Insight from the Semi-Log Chart
The section makes an important technical point about how the data is presented to enhance understanding.

• The first chart uses a linear scale, which makes it look like the benefit of reinvesting doesn't really kick in for 50 years. This is visually misleading because it compresses the early years.

• The second chart uses a semi-log scale, which is designed to show percentage growth accurately. On this chart, the two lines are straight, indicating consistent compound growth for both paths. Crucially, this chart reveals that:

  • The benefit of reinvesting dividends starts from day one.

  • The advantage consistently increases over time. The lines diverge right from the start and never converge.

4. The Staggering Numerical Evidence
The section provides the key takeaway in numerical terms:

• The investment with dividends reinvested achieved a compound annual growth rate of about 10.5%.

• The investment without dividends reinvested achieved a compound annual growth rate of only about 5.7%.

This seemingly small difference of 4.8% per year, when compounded over 80+ years, is the difference between a $100 investment growing into a fortune versus growing into a much more modest sum.

5. The Link to Other Success Stories
This section directly explains the phenomenal success of investors like Anne Scheiber and Grace Groner from Section 4. Their wealth was not built by brilliantly timing the market or picking obscure, skyrocketing stocks. It was built by consistently owning quality companies and, most importantly, reinvesting the dividends those companies paid out for decades. This passive, disciplined strategy was the primary driver of their millions.

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Summary of Section 5

Section 5 demonstrates, with powerful visual and numerical evidence, that reinvesting dividends is a critical determinant of long-term investment success, harnessing the full power of compound growth.

• The Core Finding: An investment in the S&P 500 with dividends reinvested grew at 10.5% annually, while the same investment without dividends reinvested grew at only 5.7%.

• The Mechanism: Reinvesting dividends allows an investor's returns to generate their own returns. This process of buying more shares with dividend payouts creates a snowballing, exponential growth effect over time.

• The Visual Proof: Charts show that the benefit of reinvesting is not a distant event but provides a consistent and ever-increasing advantage that starts immediately and compounds for decades.

• The Practical Implication: For a long-term investor, opting to take dividends as cash instead of reinvesting them is equivalent to voluntarily switching off the primary engine of wealth creation. It is the single most important habit for building wealth passively and consistently.

Return Characteristics of Equity Securities

The two main sources of an equity security's total return are:

• Capital gains from price appreciation
• Dividend income

The total return on non-dividend paying stocks only consists of capital gains.

Investors in depository receipts and foreign shares also incur foreign exchange gains (or losses).

Another source of return arises from the compounding effects of reinvested dividends.

Dividend Reinvestment Plans (DRIPs) and the Value Investor

1.  Dividend reinvestment plans (DRIPs) are often programs run commission-free by individual companies, enabling investors to regularly reinvest dividend payments in new shares and to increase holdings.

2.  DRIPs are useful to impose self-discipline for those otherwise easily distracted from adding principal to their investment resources - not a value investing trait but DRIPs can be attractive to value investors for their convenience.

3.  Dividends paid on account shares are automatically reinvested when declared, rather than paid to the holder.

4.  For regular dividend-paying companies, this can mean steady additions to equity securities.  

5.  DRIPs also typically offer holders the chance to have funds automatically taken from bank accounts at designated times to buy additional shares.

6.  Investors can set dates to follow paydays, creating additional discipline that yields substantial sums.

7.  A key benefit of the steadiness of DRIP funding is that dollars are invested at regular intervals, when price is below value and when above.

8.  If maintained over a long period, these discrepancies result in owning shares purchased at an average cost lower than the average of the prices on each purchase date.  Hence the term "dollar cost averaging."

9.  While certainly not pure value investing, DRIP's dollar-cost-averaging can produce impressive investing gains.  

10.  And there are value investing attributes of using DRIPs.

11.  DRIPs and dollar cost averaging reduce the number of decisions an investor must make.  

12.  They are also attractive because few stocks meet properly defined value investing criteria.

13.  Value investors monitor the fundamentals of the businesses and only take action to stop buying or to sell when preset fundamental factors have deteriorated to preset levels.  

Five Basic Fundamental Investing Principles

History has demonstrated that there are five basic principles that 
you should follow if you want to be truly successful.

Invest Regularly in the Stock Market

Reinvest all of Your Profits and Dividends

Invest for the Long Term

Invest Only in Good Quality Growth Companies

Diversify Your Portfolio

Financial Planning and Reinvesting Your Passive Income

Reinvest money from passive income

My Cash Flow Framework

Cash Flow Diagram

HAVE YOU STARTED YOUR JOURNEY TOWARDS FINANCIAL FREEDOM?

No, what is financial freedom?	7 (6%)
No, I don't intend to start my journey.	1 (0%)
No, but I am preparing to start my journey.	26 (25%)
Yes, I have just started my journey.	40 (39%)
Yes, I am half-way in my journey.	17 (16%)
Yes, I have achieved financial freedom already.	10 (9%)

Source:  

My Investment Portfolio in Singapore

Saving Money In Singapore

Lessons from a Secret Multi-Millionaire: How Anne Scheiber Amassed $22 Million From Her Apartment

By Joshua Kennon, About.com Guide

In the mid 1940’s, Anne Scheiber retired from the IRS where she worked as an auditor. Using a $5,000 lump sum she had saved, and a pension of roughly $3,150, over the next 50+ years, she built a fortune from her tiny New York apartment that exceeded $22,000,000 upon her death in 1995 when she left the funds to Yeshiva University for a scholarship designed to help support deserving women. Here are some of the lessons we can learn from this ordinary woman that achieved extraordinary wealth.

1. Do your own research

Sheiber was burnt by brokers during the 1930’s so she resolved to never rely on anyone for her own financial future. Using her experience with the Internal Revenue Service, she analyzed stocks, bonds, and other assets. The result: She owned only companies with which she was comfortable. When markets collapse, one of the best ways to stay the course and maintain your investment program is to know why you own a stock, how much you think it is worth, and if the market is undervaluing it in your opinion.

2. Buy shares of excellent companies

When you’re really in this for the long-haul, you want to own excellent businesses that have durable competitive advantages, generate lots of cash, high returns on capital, have owner-oriented management, and strong balance sheets. Think about everything that has changed in the past one hundred years! We went from horse and buggies to cars to space travel, the Internet, nuclear knowledge, and a whole lot more. Yet, people still drink Coca-Cola. They still shave with Gillette razors. They still chew Wrigley gum. They still buy Johnson & Johnson products.

3. Reinvest your dividends

One of the biggest flaws with both professional and amateur investors is that they focus on changes in market capitalization or share price only. With most mature, stable companies, a substantial part of the profits are returned to shareholders in the form of cash dividends. That means you cannot measure the ultimate wealth created for investors by looking at increases in the stock price.

Famed finance professor Jeremy Siegel called reinvested dividends the “bear market protector” and “return accelerator” as they allow you to buy more shares of the company when markets crash. Over time, this drastically increases the equity you own in the company and the dividends you receive as those shares pay dividends; it’s a virtuous cycle. In most cases, the fees or costs for reinvesting dividends are either free or a nominal few dollars. This means that more of your return goes to compounding and less to frictional expenses.

4. Don’t be afraid of asset allocation

According to some sources, Anne Scheiber died with 60% of her money invested in stocks, 30% in bonds, and 10% in cash. For those of you who are unfamiliar with the concept of asset allocation, the basic idea is that it is wise for non-professional investors to keep their money divided between different types of securities such as stocks, bonds, mutual funds, international, cash, and real estate. The premise is that changes in one market won’t ripple through your entire net worth.

5. Add to your investments regularly

Regular saving and investing is important because it allows you to pick up additional stocks that fit your criteria. In addition to the first investment Scheiber made, she regularly contributed to her portfolio from the small pension she received.

6. Let your money compound uninterrupted for a very long time

Probably the biggest reason Anne Scheiber was able to amass such as substantial fortune was that she allowed the money to compound for of half a century. No, that doesn’t mean you have to live the life of a monk or deny yourself the things you want. What it means is that you learn to let your money work for you instead of constantly striving to scrape by, barely meeting expenses and maintaining your standard of living.




To learn about the power of compounding, read Pay for Retirement with a Cup of Coffee and an Egg McMuffin. With only small amounts, time can turn even the smallest sums into princely treasures.

http://beginnersinvest.about.com/od/investorsmoneymanagers/a/Anne_Scheiber.htm

Guinness Anchor Christmas cheer: Remember to Reinvest the Special Dividend

Investing is simple, but not easy.  Here is the rough calculation of the returns from Guinness for those who bought and held for the long term.

20.8.1992  Bought Guinness @ 4.38

13.12.2011  Guinness is trading @ 12.98

Investing period:  19 years

Capital gains:  8.60

Capital gains CAGR:  5.88%

Dividends paid in 1992:  36.4 sen  DY based on cost:  8.31%

Dividends paid in 2011:  54 sen  DY based on cost:  12.33%

Average DY over the last 19 years:  10.3%

Total average yearly return from Guinness = 5.88% (capital gain) + 10.3% (dividend) = 16.2%.

This is yet another stock that has returned 15% per year to its shareholders over many years consistently.

The total average return per year from Guinness = 16.2%.  
Let us translate this into CAG returns over the 19 year period.

Assuming the dividends were not reinvested into Guinness:
The total returns from this investment are as follow:
At end of 19 years, the 4.38 initial investment would have grown to 12.96.
The amount of dividend collected over the 19 years was 8.94.
Therefore, the initial 4.38 has become 12.96+8.94 = 21.90 over 19 years.
This gives a CAGR of 8.84%.

The DY of Guinness over many years range from 5.4% to 7.0% (average 6%).  

Assuming the dividends were reinvested at the end of each financial period back into Guinness and that theaverage DY was 6% for each investing year.
At the end of 19 years, the 4.38 initial investment would have grown to 41.60.
This gives a CAGR of 12.58%.

Assuming the dividends were reinvested at the end of each financial period back into Guinness and the DY for each period was the lowest of 4% for the 19 years.
At the end of 19 years, the 4.38 initial investment would have grown to 28.42.
This gives a CAGR of 10.34%.

.. and if you have bought GAB in Jun 2008 ...

Counter   Purchase Date   Price      Current Price       
GAB      04-Jun-08           5.35           13.14

Total % gain (excluding dividends)  145.6%.
This is a CAGR of 25.19% over 4 year period or 35% over 3 year period in its share price, excluding dividends.   


There are times when you can buy these great stocks cheap.  You will get fantastic returns over the initial few years of your "good timing pricing" in your investing.  Over the long period, the returns will attenuate to those of what the stock delivers over its long term.

(The above calculations of returns exclude special dividends.)

A surprisingly large part of the overall growth in most portfolios comes from reinvested dividends rather than in appreciation of the stock prices. A yield of 3% may appear small but over a period it makes a big difference. Choose some investments with a solid history of dividends and use them as the ballast in your ship.

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Wednesday December 14, 2011

Guinness Anchor Christmas cheer

Special dividend higher than last year’s full dividend

GUINNESS Anchor Bhd's (GAB) shareholders are getting some Christmas cheer when it came to light on Monday that the brewery will be disbursing a special single-tier dividend of 60 sen per 50 sen share for the financial year ending June 30, 2012 (FY12), which, notably, is even higher than its full-year FY11 dividend per share (DPS) of 54 sen.

If you were paying attention though, this would not have been a total surprise. StarBiz had previously reported in October that GAB's management was looking at ways to reward shareholders, a move not uncommon among cash-rich brewers.

A report by OSK Research analyst Jeremy Goh on Nov 29 had highlighted the possibility of a higher dividend, either through a higher payout ratio or special dividend. “In fact, we do not discount the possibility of a special dividend,” he said at the time, adding that GAB has a cash pile of RM164mil, or 54 sen per share.

In a follow-up report, Goh said that with the just-announced dividend, the DPS for FY12 would almost double from 61 sen to RM1.21, based on a 90% payout rate. This, he said, translated to a “very attractive yield” of 9.9%.

But in Malaysia's relatively small beer market where two players dominate GAB's latest move inevitably prompts the question: will its closest rival,Carlsberg Brewery Malaysia Bhd, soon do the same?

Carlsberg's shareholders might seem to think so. While both shares were on the top gainers list yesterday, with GAB adding 70 sen to RM12.98 and Carlsberg 31 sen to RM8.46, the latter's stock traded more than twice as heavily. As many as 469,700 Carlsberg shares changed hands versus GAB's 221,600 shares.

Analysts, however, are not counting on a bumper dividend from Carlsberg. As at Sept 30, it had RM82.7mil in cash and RM94.2mil in loans and borrowings as opposed to GAB, which had zero debt and RM164mil in cash and cash equivalents.

An analyst said that based on historical performance, Carlsberg's dividend payout averaged 50% to 70% against GAB, which paid out 90% of its earnings in FY11.

Nonetheless, Carlsberg did reward shareholders with a 58 sen dividend last year after it acquired Carlsberg Singapore Pte Ltd for RM370mil in the fourth quarter 2009.

Another analyst pointed out that while Carlsberg and GAB were fierce competitors, they had not been known to compete on the dividend front.

On the rationale for GAB's distribution of a special dividend, analysts said it was to optimise the brewery's capital structure. An analyst explained that GAB had to choose between making an acquisition or capital management, and since the choice of acquisition targets in Malaysia was limited, it opted to distribute cash to shareholders.

“Even when Carlsberg made an acquisition last time, it was in Singapore,” she noted.

GAB also recently proposed to issue RM500mil in debt notes for capital expenditure (capex) and working capital. Of the RM80mil-RM100mil capex to be spent in FY12, RM40mil has been apportioned to a new packaging line and RM30mil to upgrade its information technology infrastructure. The debt papers were given an AAA rating by RAM Ratings.

OSK's Goh, in his Nov 29 report, had also said that GAB was debt-free prior to the debt issuance, which raised its weighted average cost of capital (WACC) to 7.1%. The new debt notes, he said, would bring its WACC down to a more efficient 5.4%, assuming an effective tax rate of 25%, and the company's debt to equity ratio to 47:53.

On whether another extraordinary dividend was in the offing from GAB, its finance director Mahendran Kapuppial told StarBiz: “We do not have any plans for further special dividends.

“Historically, we have paid between 85% and 90% of our profit after tax as normal dividends to our shareholders and we do expect this to continue in the future. Looking at our current debt to equity ratio, the board felt that a one-off special cash dividend is appropriate.”

http://biz.thestar.com.my/news/story.asp?file=/2011/12/14/business/10091275&sec=business

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Why Buy and Hold Will Always Be a Sound Investing Strategy

It seems like the debate regarding the merits of the "buy-and-hold" investing strategy is alive and well. We always find these discussions amusing, because we believe that it is such a pointless discussion. There is no general argument or case that can be made to support the buy-and-hold strategy or to negate it.

The only true answer to the buy-and-hold argument is it depends on what and/or when you buy-and-hold.

• If you buy the right company at the right price, then buy-and-hold is a great strategy. 
• If you buy the wrong company at any price, then the buy-and-hold strategy is a dumb move. 
• Also, if you buy the right company at the wrong price, then buy-and-hold would once again be a bad move.

http://myinvestingnotes.blogspot.com/2010/10/why-buy-and-hold-will-always-be-sound.html

The power of compounding from Reinvested Dividends

The two charts below show the cumulative return of a dollar for the S&P 500 Index on a price only basis and total return that includes reinvested dividends since 1926. The second chart shows the power of compounding on a percentage basis.

The results of reinvesting dividends

http://www.dividend.com/dividend-stock-library/dividend_reinvestment_plans.php

The Importance of Dividends

Although many investors consider the current 2% yield offered by the S&P 500 to be trivial, it would be a huge mistake to dismiss dividends. In fact, a look back at statistical data over the past 75 years shows that nearly half of the market's total returns have come in the form of dividends. Between 1926 and 2004, dividends represented approximately 42% of the total return delivered by the S&P 500. Over that same span, it's been calculated that $1,000 invested in the S&P would have grown to $2.3 million if reinvested dividends are included, but only $90,000 without the dividends.

If history is any guide, then dividend-paying stocks should also perform better than their non-paying counterparts over the long haul. Contrary to conventional wisdom, studies have shown that dividend payers handily outperformed non-payers from 1970 to 2000. At the same time, those same dividend-paying stocks experienced far less volatility. They could also be counted on to deliver stronger relative returns in difficult market environments. What's more, according to the latest data from Standard & Poor's, dividend-payers are still outpacing non-payers in today’s volatile marketplace.




An example of looking at dividend (above graph)
Dividend growth has been steady but not spectacular.

http://web.streetauthority.com/cmnts/pt/2006/02-15.asp