Sound Investment

A CONTRACTION in China's manufacturing sector and Federal Reserve chairman Ben Bernanke's hint that the US central bank could soon begin tightening sent markets in Asia and around the world into turbulence and tailspin yesterday. Share prices in Tokyo, which have seen dramatic gains this year, plunged by more than 7 per cent while stocks also dived elsewhere.

YIELD plays fell like clowns in banana-peel shoes yesterday as the Singapore stock market suffered its deepest one-day drop in a year on fears that the US Federal Reserve would rein in stimulus measures sooner rather than later. REITs at these level have limit upside as most of the REITs yield is about 5% any increase in interest rate will hit hard on REITs.

Get Rich with Dividends

There are two important steps to take if an investor wants to grow their wealth so significantly.

1.Invest in Perpetual Dividend Raisers - these are stocks that raise their dividends every year. And, hopefully, they do it at a meaningful pace. A 1% raise is better than no raise at all, but 10% is a heck of a lot better than 1%.

2.Reinvest the dividends - that allows the dividends to compound. When an investor reinvests the dividends, they buy shares with their dividends (usually commission free), which generates more dividends, which buys more shares, which generates more dividends, etc. The power of compounding is incredible.
Here is an example:

An investor buys 400 shares of a $25 stock. His initial payout is $10,000. The stock has a 4% yield, which grows 10% per year. And over the decades, the stock goes up in line with the historical market average.

At the end of one year, the stock will generate $415 in income (not $400 because the dividend is reinvested quarterly). After that first year, the investor will own 415 shares.

After five years, the investment produces $711 in income and the shareholder owns 490 shares.

After a decade, the investor receives $1,440 in dividends annually and owns 617 shares.

At this point, the shareholder now owns over 50% more shares than he started with and those shares are all generating a higher dividend than the original position 10 years earlier.

After two decades, the holdings produce $6,440 in dividends on 1,053 shares, achieving a 64% annual yield on the original cost.

By the time we hit the 30-year mark... things really start to heat up. The $10,000 investment now earns $32,508 in annual income on 2,127 shares - a yield of 325% on the original investment

And 40 years after the initial stake, the figures are incredible. The investment generates $203,600 in annual income on 5,062 shares. The yield is now 2,036%.

This works in real life... not just in theory.

A $10,000 investment in Colgate-Palmolive (NYSE: CL) 30 years ago would have you $9,732 short of being a millionaire today.

And 10 grand in McDonald's would have turned into $944,806.

Better Than a Gift Card

With the end of the school year approaching, you probably know someone who is graduating from high school or college.

If you need to give them a gift, consider shares of a quality Perpetual Dividend Raiser. Give the graduate the explicit instructions that the stock is not to be sold for at least 20 years.

When the kids use the money to buy a house, send their own kids to college or even help fund their retirement decades from now, they'll look back fondly on the gift you gave them this year.

I hope at least one of those students that I spoke with will look back on my presentation and remember Mr. Singer's guest speaker who made them forget about lunch for a half hour and instead opened their eyes to a rich financial future.

Good investing,
Marc

Dear Foolish readers,

What was the first thing that went through your mind when you heard that the Tokyo Nikkei 225 index fell 7% last Thursday?

The plunge in Japan's benchmark index was precipitated by a 100-points drop in America's Dow Jones Industrial index the previous day. What's more, the stock market fall in Japan was swiftly followed by 2% falls in Hong Kong's Hang Seng and Singapore's Straits Times indices.

What kind of investor are you?

So back to my question, did you:

(A) Think that you should have heeded the "Sell in May" advice?
( Jump with joy because you could now buy more shares at a cheaper price or
(C) What fall are you talking about?

If your answer is (, then give yourself a well-deserved pat on the back. You are a real investor who understands the meaning of being greedy when markets are fearful and being fearful when the markets are greedy.

If you answer is (C) then please drop me a line sometime to let me know how you managed to tune out what is going on in the global economy. I wish I could do the same.

I, on the other hand, can't. I have to keep on top what is happening in global markets, and thankfully I did. On that eventful Thursday morning, I was invited onto CNBC's Asian Squawk to comment on the mini collapse of global stock markets.

But if your answer is (A) then I am afraid to say that you have probably not bought shares because you fully understand what their intrinsic values are. Instead you have probably bought them because you think they would just simply carry on rising...until they don't.

Would you like another glass of punch?

But let me take you back to what caused the mini stock market collapse. It happened shortly after Ben Bernanke hinted that the Federal Reserve may, and I stress the word "may", reduce monetary easing.

In other words, the US central bank has flagged up the possibility that it might need to take its foot off the gas and stop flooding the US economy with as much money as it has done before.

The loose monetary policy adopted by the Federal Reserve has often been likened to bringing out the punch bowl at a party. Consequently, everyone gets very "happy" provided the punch keeps flowing. However when the punch bowl is taken away, the party can draw to a close quite quickly.

But it is important to remember that Bernanke never said he was removing the punch bowl. He said he might not put as much rum in the punch, which is not quite the same thing.

Will the party ever end?

At no point did Bernanke suggest bringing back prohibition. But even if he did, it could suggest that the US economy may be strong enough to grow without further stimulus.

Aside from the US, the markets were unsettled by a downbeat report on the Chinese economy. It suggested that China may be cooling down more sharply than expected. So, it might not meet the government's growth target of 7.5% this year.

But let's not forget that China is shifting from a command economy, in which the government makes all the decisions, to a consumer-led economy where its people will have a greater say in how they would like to spend their money. That's a good thing for China and for the rest of the world too, but the transition will not happen overnight.

For me, the wobble on Thursday is a useful litmus test for anyone who calls himself or herself an investor. It will help to separate those who understand the benefits of long-term investing from those who buy shares just for the short-term thrill.

When we invest, we need to appreciate the intrinsic or underlying values of the shares that we are buying. We need to remember that any fall in the stock market does not affect the intrinsic value of a business.

Investors versus Disinvestors

The intrinsic value of a business is derived from the value that the company can generate for its shareholders over the long term. So, a few words, from even someone as influential as Ben Bernanke, will not affect the intrinsic value of a business. He might be good but he's not that good.

The event such as the one we witnessed last Thursday is unlikely to be a one-off. As long-term investors we will undoubtedly experience many more like it. But each event should be viewed as just another opportunity rather than an annoying threat.

However, to take advantage of those opportunities you will have to be prepared. You will need to do your homework well in advance to know when the shares of the companies you have always wanted to own have fallen below their intrinsic values.

Before I end, I'll leave you with a thought on the subject from Warren Buffett.

He once told investors to smile whenever they see a headline that says: "Investors lose as markets fall." He went on to tell them to edit in their own minds the headline to read "Disinvestors lose as markets fall - but investors gain."

Foolish Best,

David Kuo
Director, Motley Fool Singapore

I have checked on the REITs I hold and most of them have hedged their interest rate risk on borrowings. This factor is not taking into account by analysts. REIT managers in singapore are proactive. I guess the heavy selling is due to the outperformance of this sector and the weak economic data from China - both sector and regional influence. REIT investing is still a viable option for income play.

I have sold off most of my REIT. I will buy back when the yield are higher, maybe about 8% yield onward.

lotustpsll wrote: I have checked on the REITs I hold and most of them have hedged their interest rate risk on borrowings. This factor is not taking into account by analysts. REIT managers in singapore are proactive. I guess the heavy selling is due to the outperformance of this sector and the weak economic data from China - both sector and regional influence. REIT investing is still a viable option for income play.

hi lotusspell,

What do you mean by hedging against borrowing costs? How did those reits do it? Do you mean they have fixed interest borrowing??