Tuesday, 25 October 2011

Dividends are the way to retire early

I have always been fascinated by dividend returns from stocks as a means to support my income needs once I have actually retired.  Dividends are particularly exciting since they are not taxed at this time (of course once the new tax code kicks in, dividends may be taxed as well)

As an example Azim Premji, the promoter of Wipro, took home Rs1345Crore (approx USD$269 Million) in the form of completely tax free dividends in 2011.  Of course, being a promoter of Wipro, he owns about 74% of Wipro shares. 

Now I cannot dream of owning so many shares of a leading blue-chip company, but I plan to start in my own small way.  I have identified Hindustan Unilever as the company in which I will invest to secure dividend returns.  I started with ERU2.37 invested in Hindustan Unilever.  That investment is currently worth ERU3.13, which is a healthy 30% gain.  However, my primary motivation behind this investment is not stock capital gains, but the steady stream of dividends from this FMCG company.  So henceforth, I will separately track all dividend returns from this investment, and also re-invest it back into HUL shares to grow my nett investment corpus in HUL.

Finally, while I wait for the dividends to accumulate, I also use a fairly risky options call writing strategy to derive additional monthly income.  For the Oct25'2011 expiry, I have made ERU0.18.  This is a very small number, but given that the risk is high, I do not have the guts to write more calls.  Still it is a 5.7% monthly return on my HUL investment, which is quite significant.  I will continue to try my option call writing for the Nov'11 expiry, and in the meantime re-invest the Oct'11 expiry gains back into HUL shares. 

Lets see how this strategy pans out over the long run.

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