Dividend Plays All The Rage

Foreword from ShareInvestor

This article “Dividend Plays All The Rage” by Goh Eng Yeow was first published in The Straits Times on 29 Apr 2013 and is reproduced in this blog in its entirety.

Their stock prices have shot up but the bull run may not last

It did not look like it at the time but investors scored big after StarHub lost the rights to show English Premier League football more than three years ago.

The telco’s share price plummeted 6.5 per cent on the news but that temporary blip turned out to be a bonanza for value investors, who piled in, lured by the firm’s rich dividend policy. 

Since then, there seems to have been no let-up in the appetite for StarHub. Indeed, it is one of the best performers among Straits Times Index (STI) component stocks, gaining 41.3 per cent in the past year. 

The secret to its fantastic stock price performance? It has remained one of the best-paying STI dividend plays, with a dividend yield of 4.4 per cent.

This fact is not lost on yield-hungry investors as they research for safe havens for surplus funds amid a climate of near-zero interest rates for savings. 

Besides StarHub, there are a number of high-dividend-paying counters with similar staying power: fellow telcos SingTel and M1, and real estate investment trusts (Reits) such as CapitaMall Trust and Ascott Residence Trust.

Indeed, analysts and the investor education portal established by the Singapore Exchange – SGX My Gateway – have been touting the attractions of solid dividend plays. 

As an article on SGX My Gateway last August noted, telcos and Reits have been among the most consistent performers, collectively posting gains each quarter. 

The FTSE Reit Index has risen by 35 per cent over the past 12 months while the FTSE ST Telecommunications Index is up 29.2 per cent. They beat the STI, which gained 11.7 per cent over the same period. 

But all of this raises one key question: Is this run too good to last? 

Take a look around the globe and you will find that the hunt for yield is not confined to Singapore. Some investors now regard the dividend payout as an important indication of a company’s performance. 

It flies in the face of modern financial theory that dividends do not matter; that whether a firm pays profits out to investors or reinvests them should not make a difference to the share price.

But as Financial Times investment editor James Mackintosh noted recently, dividends do matter in the real world. This is reflected by the outperformance of high-dividend-paying stocks around the world, from Singapore to New York. He wrote: “Investors are entranced by dividends – so much so that they are starting to look dangerously overvalued, especially in the United States.” 

High-yielding US stocks are trading at higher valuations than low-dividend ones as investors search for alternatives to bonds, whose yields have fallen sharply amid low interest rates.

“There is not just the hunt for yield. Investors want quality too, with reliable dividend payers trading even higher – Coca-Cola is trading at 19 times its price-to-earnings (PE) while Switzerland’s Nestle is above 18 times,” said Mr Mackintosh. 

The same corollary runs in our market. StarHub is priced at 21.5 times its PE and SingTel trades at 16.7 times. The 30 stocks that make up the STI, on the other hand, have an average 13.6 times.

Mr Mackintosh flagged some dangers facing high-dividend plays: “A high dividend is no longer an indicator of a cheap stock.”

The obsession with dividends may also hurt the economy eventually. “The more investors push for payouts, the less companies have to invest,” he said. 

The biggest danger facing dividend stocks may yet come from an unlikely quarter – the sudden plunge in gold prices.

True, unlike dividend plays, gold offers no yield. But gold’s recent drop is worrying because it comes in tandem with a collapse in other commodity prices.

In the past two years, industrial metals have fallen 32 per cent while crude oil prices are down 20 per cent. Throw in recent disappointing export numbers from Singapore – one of the most open economies globally – and this suggests that the world may be headed for a prolonged period of sluggish growth.

This means that while stock prices may be sailing to record highs in markets such as Wall Street, they may take a beating when investors realise that earnings growth is not forthcoming. It may be time to trim the sails on dividend plays.