In the real world, this concept relates to a passive income.
Back in the 90s, I would hear the term “living on interest” from time to time – but this was an era when double digit interest rates are still available. As interest rates declined throughout the years (because of lower inflation), this concept is then transformed into investing in real estate and living from the rental income.
In today’s economy, buying properties is a tall hurdle and may force your wealth into being too concentrated. This is the time where dividend-paying funds show their appeal as a passive income source as you can invest smaller amounts while enjoying similar benefits.
Dividend Paying Funds: How Does It Work?
Tradeoffs: Capital Growth vs Earnings
While there is no perfect investment, there’s always a tradeoff – you just have to ensure that what you’re getting is most meaningful to you. In the case of dividend paying funds, you get income paid out on a regular basis. However, this also means that you may be missing out on the compounding growth of your funds from reinvestment.
Dividend paying funds, if using stocks, would also tend to be positioned in mature companies. Companies that are seeking growth will typically pay lower or no dividends while its usually the stable companies that would pay out higher dividends. Because of the above reasons, dividend paying funds will have a smaller capital growth than nondividend paying funds.
Parting Words …
Henry is a graduate of University of the Philippines for Electrical Engineering—the first few years of his career are in building maintenance, electrical design, and installations for construction projects, and even teaching engineering to the next generation. Afterwards, he took his Masters in Business Management also from UP Los Banos and worked at various investment-related roles from a top local bank, a US-based investment company, to a global insurance competitor. He is also a CFA Charterholder.
Currently, he is the Allianz PNB Life Head of Investments.