By Jeff Kum | 7 November 2018
Long-term investors always look at passive returns for their investment asset and most will opt for a fixed deposit to gain interest rates. But why most of the fund managers across the world invest in the stock market instead?
To answer the question above, we need to explore why a stock market is an attraction for them to invest. Most of the public listed company lead by a CEO (Chief Executive Officer) where his performance is driven by giving a good investment return to his bosses, which is the chairman and the shareholders. By doing that, most of the company will provide a dividend return rates that better than FD rates or will buy back shares from time to time to elevate the stock price to make it worth to hold the shares for future gain or do both.
Growth Yield Company
A company that focuses on growth yield usually will buyback company shares using profit generated from the company business or other investment profit/dividend gain. This practice will limit the shares quantity traded in the market, hence reduce the volatility and make it worth to hold by creating a scarcity of the stock.
Some growth company will give out dividend but most of the time will be lower than fixed deposit rates. The reason is the company will need the cash to be invested back into the company by expanding the business or increase the investment asset holding like property, other company stock etc. By doing this exercise, it will improve the company value, hence attracting long-term investors.
Most stock price in growth yield company will be in a long-term uptrend and tend to be more resilient to the short-term market volatility. The stock price also tends to be much more expensive compared with the dividend yield company. In the longer term, the growth yield company mostly will surpass dividend yield company regarding yield returns. Example, the company A stock price that worth RM10 only give dividend 1% yield and if you buy now will get RM0.1 dividend year later. But after ten years, when the stock price increase to RM100, 1% dividend equal to RM1 which mean your dividend returns from your initial RM10 had increased from 1% to 10%!
Dividend Yield Company
Dividend yield company almost an opposite from growth yield company, where most of it tends to have limited cash for investment growth in future, stock price either in sideways or downtrend and they always give dividend higher than fixed deposit rates and more succumbed to short-term market volatility.
Investors who invest in dividend yield company will hold the company stock in a shorter-term timeframe. This type of company normally will need to be able to generate consistent cash flow like the gaming industry. Future revenue and profitability will be less important here as compared to the growth yield company.
Some companies had exceptional where there are more resilient to the stock market price volatility, especially REITs holding. REIT income generated by rental yield from the property and property price tend to rise in future, which brings up the REIT value, hence tend to trend higher but at a slower pace.
While further study and more in-depth analysis needed to find a good shares company to invest for long-term, above guideline can serve as basic knowledge for a start. The investor is advised to understand his/her investment timeframe as well as the desired profit target in the foreseeable future.