Looking to Accelerate Your Wealth Accumulation? Here is How to Harness the Power of Compounding

It is no secret that investing is one of the best methods to help you build and grow your wealth.

Of course, there are guidelines you need to follow and risks to watch for.

The important thing, however, is to ensure you kick-start your investment journey by parking some money in stocks.

As a beginner investor, you are probably wondering how to go about growing your wealth.

There is a magical word called “compounding” that can help to accelerate your wealth accumulation and grow your retirement funds.

But before we get to that, let us have a look at some suggestions on how you can start and begin to enjoy healthy returns from the stock market.

Gunning for growth

When you are young, you can afford to park more of your funds in growth stocks.

As their name suggests, growth stocks include companies that are focused on growing both their revenue and profits.

Some of these businesses reinvest all their profits back into the business to grow it further.

As a result, these stocks either do not pay a dividend, or only pay out a small amount.

However, the good news is that investors will be rewarded with a higher share price as the business becomes more valuable.

Over time, you can enjoy capital appreciation as the share price rises steadily.

The US stock market offers tantalising choices for growth stocks but some of these possess more risks as they may not generate a profit yet.

You can check out several cybersecurity stocks or look for growth stocks that recently hit their 52-week highs for investment ideas.

Over in the Singapore stock market, there are also opportunities to accumulate growth stocks.

Blue-chip stalwarts such as Keppel Corporation Limited (SGX: BN4) and Sembcorp Industries (SGX: U96) have demonstrated healthy growth in the last several years.

There is also financial technology company iFAST Corporation Limited (SGX: AIY) that should see its profits rise sharply this year with the commencement of its Hong Kong ePension project.

Dividend stocks for passive income

Apart from growth stocks, you should also sprinkle in stocks that pay out a consistent dividend.

These dividends act as a useful source of passive income that can supplement your earned income.

They also form the bedrock of your passive income stream as you work towards retirement.

The idea is to start with a small inflow of dividends and then slowly build this up till it becomes more substantial.

To do so, you should consider investing money in solid, dividend-paying stocks.

The REIT sector is a popular one for income-seeking investors.

REITs are required to pay out at least 90% of the profits as distributions to enjoy tax benefits.

This requirement makes them suitable as income instruments that pay out a reliable dividend either quarterly or half-yearly.

REITs such as Parkway Life REIT (SGX: C2PU) have raised their core distribution per unit (DPU) without fail since its IPO and look set to continue doing so.

Mapletree Logistics Trust (SGX: M44U) and Keppel DC REIT (SGX: AJBU) have also remained resilient and reported higher year-on-year DPU despite the twin challenges of inflation and higher interest rates.

Aside from REITs, numerous companies pay out a dividend.

Some examples include vehicle inspection specialist VICOM Limited (SGX: WJP), Singapore’s largest bank DBS Group (SGX: D05), and integrated healthcare specialist Raffles Medical Group (SGX: BSL).

The beauty of compounding

If you are still wondering about how compounding works, here is a quick summary.

As you build up your savings over the years through increased salary, savings and bonuses, you can afford to inject more cash into solid businesses.

And as these businesses grow over time and their share price rises, your investment portfolio will also see a corresponding rise.

As for the dividends you receive from REITs or dividend-paying stocks, you can choose to reinvest them in the same stocks that paid them out.

By increasing your stakes in these stocks, and as the dividend per share increases over time, you enjoy a double bonus as your passive income flow enlarges.

This process shows the power of compounding and how it can work its magic to not only increase the value of your portfolio but also bring you a greater flow of passive income.

Get Smart: All you need to do is to begin

As you can see from the above, investing is not that tough.

All you need to do is to begin by parking some money in strong, robust stocks.

You can choose to allocate your funds between growth stocks and dividend-paying stocks.

What you do need, however, is patience.

Compounding can only work its magic if you consistently reinvest your money into the stock market and carry on buying solid businesses.

If done right, retirement should be a breeze as you welcome your pot of gold and savour the fruits of your investments.

Our team has spent decades scouring SGX for stocks. And we think dividends could be the answer to rising inflation and market uncertainty in 2023. With our newest FREE report, you’ll have everything you need to find, keep and make more money from dividend stocks. Click here to download it for free.

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Disclosure: Royston Yang owns shares of iFAST Corporation Limited, Keppel DC REIT, VICOM, DBS Group and Raffles Medical Group.

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