Dividend Stocks Worth Checking Out

Foreword from ShareInvestor

This article “Dividend Stocks Worth Checking Out” by Jonathan Kwok was first published in The Sunday Times on 04 Mar 2012 and is reproduced in this blog in its entirety.

Shares that deliver a decent yield may be a better option than putting your money in the bank, given the low interest rates

Putting your cash in the bank might be the safest thing to do, but with interest rates at 1 per cent it hardly qualifies as canny investing.

A more brutal assessment would be to brand it as slightly unwise, especially when far better returns can be had elsewhere.

Like in shares. Yes, the stock market has been a graveyard for some in recent years, a roller coaster of much pain, some profit and no end of panic.

But stocks can promise a decent dividend – just witness some of the top performers that have reported their results in recent weeks.

A check by The Sunday Times of stocks with a market capitalisation of at least $500 million shows a range of blue chips, medium-sized firms, real estate investment trusts (Reits) and business trusts that offer a yield of at least 6.7 per cent.

The top performer is Elec & Eltek, a maker of printed circuit boards with operations in Asia, Europe and the United States.

The firm recently proposed a final dividend of 12 US cents (15 Singapore cents) a share. This comes on top of the interim dividend of 15 US cents already paid out.

If you take the full-year payout of 27 US cents on its Thursday closing price of US$2.54, the dividend yield for the stock works out to 10.63 per cent.

Put simply, if you had managed to buy one lot of the shares at US$2,540 last year, you will – by the time the final dividend is paid around April – reap a dividend of US$270 and hence a one-year return of 10.63 per cent. The calculation assumes no changes in the share price throughout this period.

Bounce that off your term deposit. You would be lucky to get US$25 (or 1 per cent) from that US$2,540.

If you buy the shares now, you will be entitled only to the final dividend of 12 US cents, but that still works out to a pretty decent return of 4.7 per cent.

Another on the top dividend stocks list is StarHub, which is an investors’ favourite. Its yield is 6.9 per cent. At $2.90 a share last Thursday, it will be $2,900 a lot. And the dividends were $200 last year.

Another plus is that it pays out dividends every quarter, so groups such as retirees can look forward to a regular stream of income.

“I’m looking for a source of passive income, and a company I can trust,” said Mr Ben Chua, 61, a retiree and private investor who has dividend stocks in his portfolio. “It’s also good if the prices of the shares can also rise.”

What You Need To Know

It all sounds good on paper, but share prices can fall too.

“The main benefit of stocks that offer good yield is their ability to beat bank deposit rates, which are very low now,” said OCBC Bank’s head of content and research for wealth management Vasu Menon. “Dividend-yielding stocks help you put your money to harder work.”

Very simply, $10,000 in a bank at 1 per cent yields $100 in interest after a year. Put $10,000 in StarHub and assume the share price does not change, and it continues the rate of its payouts – your return has gone up to $690.

But if the share price falls by, say, 10 per cent, the stock’s value will drop to $9,000. This will wipe out one year’s dividend and still leave the investor in the red by over $300.

One risk of holding a dividend stock versus putting money in a bank is that the share price fluctuates. In a downturn, an investor’s share capital will be eroded, whereas he is basically guaranteed to get his capital back if he puts it in a bank.

But Mr Menon noted that the market price of high-dividend stock tends not to fall as much during a downturn, as the yield on these stocks rises even further when markets fall, enhancing their appeal.

This means that other investors could buy into the stock, offering support for its price.

Sias Research chief executive Roger Tan noted that dividend yields provide investors with returns during bad times, or when markets are volatile and weak, as they wait for a market recovery.

Some stocks post handsome yields but these may include special dividends which may not recur.

Some firms not typically known for their strong yields have surprised the market with better- than-expected payouts or special dividends.

For example, Keppel Land announced a bumper payout after selling its stake in Ocean Financial Centre to K-Reit Asia. It is paying a final dividend of 20 cents a share. On last Thursday’s share price of $3.42, this is a yield of 5.8 per cent.

That means investors need to do their homework to check if this company has been paying out the same level of dividends regularly or if this attractive dividend is just a one-hit wonder.

One way of doing this is through the Singapore Exchange website and ShareInvestor.com, which keep track of a firm’s dividend payout history.

Investors should also look at a firm’s business model, debt ratio and cash flow, among other factors, to form a judgment on whether the payouts are sustainable and are likely to be repeated.

Identify stocks that have a clearly stated or easily discernible dividend policy.

Sias Research’s Mr Tan likes companies that have a policy of a fixed dividend payout every year – say, 20 cents a share – and top that up with a special dividend if they do better.

For example, StarHub said in 2010 it would pay out at least five cents a share every quarter for that year. Last year, it maintained the payout of five cents a quarter, or 20 cents a share.

Firms may announce such policies or investors may discern the approach from payout histories.

“The fixed dividend shows that a company is confident of paying at least a fixed sum, which means it is confident of its business and cash flows going ahead,” said Mr Tan.

Investors’ favourites for dividend stocks include Singapore Press Holdings and Cerebos Pacific.

Beware of foreign currency risk.

For firms that declare dividends in a foreign currency, returns in Singdollars will be impacted by exchange rates.

Elec & Eltek declares dividends in US dollars, while Hutchison Port Holdings Trust, a business trust holding ports in Hong Kong and southern China, declares in Hong Kong dollars.

With a strong Singdollar, even if a stock has a strong dividend payout, the return could be eroded by the exchange rate.

Reits And Business Trusts

Our top 20 list, compiled using Bloomberg data, is dominated by Reits and business trusts.

This is because both are essentially structured as yield vehicles. Reits do so by holding income-generating property assets and paying out the rents earned as distributions to unit-holders.

Business trusts hold various infrastructure assets, which can include ports or power plants, and distribute the returns to unit-holders.

Reits range from those in the office sector, such as Frasers Commercial Trust, to those in logistics, such as Mapletree Logistics Trust.

Ascott Residence Trust owns serviced apartments in Australia, Asia and Europe.

While Reits and business trusts are very popular for their regular returns, fund managers warn that much depends on the manager of the assets.

A manager has to be able to enhance the assets – such as ensuring a good tenant mix in a mall and improving the physical condition to continue to attract tenants and shoppers.

It should also buy good-quality assets and buildings to boost the trust’s income and yield.

But there needs to be a balance. As managers earn fees from the size of the assets under management, the temptation is to ambitiously buy many more buildings and assets.

Investors must discern if these purchases are good for minority unit-holders.

Sometimes, managers will finance purchases by issuing new equity, either via a rights issue or an institutional placement, noted Mr Alastair Gillespie, global portfolio manager for real estate at Principal Global Investors.

These may dilute the value of existing unit holdings.

He said investors should assess if the trust has high-quality managers that “have been proven to consistently act in the best interests of unit-holders”.

They should consistently support managers who “pursue equity-funded asset growth only when it is accretive to existing minority unit-holders”.

Mr Gillespie also said investors should recognise the way the various Reits and business trusts will perform throughout the business cycle.

Generally, office and hotel Reits will be the most sensitive to economic cycles, and their share prices could fluctuate more across the business cycle, he said.

On the other hand, retail and industrial Reits tend to be more stable due to the relative stability of retail spending in quality malls and the longer lease terms of the industrial assets. These can provide more stability across the cycle.

Other observers note that a Reit’s or business trust’s debt levels, and the size and strength of its sponsor, are also factors to consider before investment. These will determine, among other issues, if the vehicle can withstand a bad downturn.

Be Clear About Why You Are Investing In Dividend Plays

OCBC’s Mr Menon said that yields are important to beat the current high inflation, or at least reduce its eroding effects on one’s wealth.

Inflation hit a three-year high of 5.2 per cent last year.

Mr Menon said the market is entering a “new normal”, where investors could be faced with lower stock-market returns as the global economy is likely to grow at a modest pace for several years.

He said that between the 1990s and 2006, it was fairly easy for investors to make quick double-digit returns from the capital appreciation of their stocks. So many market players chose to take a speculative, short-term view of the market.

“Today, after the sub-prime crisis of 2007, the world has changed completely. Markets are volatile and economic growth has slowed considerably,” he said, adding that as a result, there are more investors taking medium- to long-term views and buying yield stocks to grow their wealth slowly and steadily.

“Yield stocks allow steady growth of your wealth even though the returns may not be phenomenal,” he said.