Alot of Singaporean investors seek Singapore dividend stocks as a means of effective income generation. Before you jump onboard the bandwagon of dividend stock investing, it is imperative that you read the following guide to build a truly successful portfolio of dividend stocks in the Singapore stock market! There are certain key principles behind why some stocks make amazing dividend stocks as supported by examples, however some stocks out there may not be all that suitable for you!
To hunt for a good dividend stock, you must first understand what exactly constitutes the purpose of investing in a dividend stock!
As opposed to growth stocks and value stocks, dividend stocks are stocks that are specifically added to your portfolio for the express purpose of generating income when the company hands out dividends. Growth stocks and value stocks are slightly different, because they are stocks hunted for bargain opportunities or growth potential to produce capital gains on your portfolio.
Now that we understand that dividend stocks are specific cash generating stocks for your portfolio here are some criteria that Dividend Stocks should fulfill:
Some investor hop onboard a certain company because it paid a good sum of dividends for a quarter or two. However, this is not sufficient criteria to determine if this stock will continue to pay good dividends for you!
There are many reasons for a company to issue out dividends, however, the biggest clue that a company is a suitable dividend stock is a strong track record of paying out dividends. Look for at least a 5 year record of consistent dividend distribution rather than just a few quarters.
For example, you can take a look at the distribution history of First REIT which I’ve taken off their website:
You can see very consistent dividend paying activity in this case. REITs are often used as Dividend Stocks in Singapore because of legal requirements to distribute their earnings as dividends and will be discussed in more detail later.
b. Payout Ratio
Once you have ascertained that the Singapore Dividend Stock you are searching for has consistent distribution of dividends, you need to assess this action for sustainability. While the consistency of dividend distribution has given you some form of confidence in the company’s ability to give you more dividends in future, you need to check the Payout Ratio.
The Payout Ratio of the prospective Singapore Dividend Stock shows you what percentage of its earnings is being paid out as dividends to shareholders.
It is calculated the following way:
Payout Ratio = (Total Dividends Paid/Net Profit of the Company) x 100%
While there is no arbitrary reference points on what is a good Payout Ratio because it varies from industry to industry, as well as the lifecycle of the company, it tells you a few important things.
For companies that have a low Payout Ratio, the company could be reinvesting a good proportion of its earnings towards growth. For companies with high payout ratios, they could be stable companies that are not actively using cash for expansion.
What you need to pay attention to are Payout Ratios that exceed 100%. If a company is consistently paying out more than it earns, it means the cash paid out to shareholders is coming from cash reserves or even debts that it has to service in future.
This Singapore Dividend Stock, VICOM LTD (V01) has paid out consistent dividends at manageable payout ratios over many years.
c. Dividend Yield and Yield on Capital
The Dividend Yield of your investment is calculated this way:
Dividend Yield = (Dividends Paid in a Year)/Price Per Share x 100%
This gives you an entire of how much returns your investment is generating for you in terms of dividends. A threshold for acceptable dividends generally falls between 4-8% for myself. Anything lower, I regard as a dividend yield that is unattractive as an investment.
Another thing to consider is the investment’s Yield on Capital. In certain cases, the current Dividend Yield on current stock price may seem unattractive, but if you had bought into this particular company earlier when it’s stock was much cheaper, the Yield on Capital it produces for you may be an extremely high percentage!
For example, if Company ABC’s stock price is now $1.00 and it distributes a dividend of $0.05 every year, producing a Dividend Yield of 5%. However, if you had bought the stock at $0.20, your Yield on Capital is actually 25%!
If you are confident on generating much higher returns by selling the stock and investing the sum elsewhere, by all means do so. But some investors choose to keep it within such a company because it generates great cash returns on their initial sum of capital vested.
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3. Strong Company Fundamentals
A good Singapore Dividend Stock does not escape from the need to fulfil strong company fundamentals. The reason is because, if the company’s fundamentals are not strong, you may end up with a case whereby your capital invested keeps going downwards in terms of share price. Despite dividends paid out, you may be facing capital losses which defeats the purpose!
Dividends distributed to shareholders must come from somewhere. This typically comes from cash that the company holds, which in turn comes from the earnings or net income of the company! If a company is unable to be reliably profitable from it’s business model, there’s not much point discussing about dividends!
These are some of the strong company fundamentals that a suitable Singapore Dividend Stock should own:
a. Strong Economic Moat
A strong Economic Moat allows for the business to continue it’s operations despite external pressure from competition. It protects it’s core business model and allows for continued profit generation that ultimately translate into dividends. Without an Economic Moat, a business model typically collapses under external pressure and will no longer be able to generate profits and dividends for its shareholders.
An example of an Economic Moat is how American E-commerce Giant, Amazon has built an invaluable database of buyers and sellers. This constitutes a network effect whereby it’s service as a platform connecting buyers and sellers has been made incredibly valuable by its database. This in turn attracts even more clientele, something that other businesses will find an incredible challenge to dethrone.
b. Competent Management with Integrity
In the world of businesses, every now and then, we run into companies run by ghastly management practices. Some management would stoop so low as to siphon funds out of the business. When this happens, you can forget about your investment functioning as a sustainable Singapore Dividend Stock for your portfolio! Check for management competency and integrity. Often, share buying or selling activity of management gives you a good idea of how aligned the management is with your interests!
c. Strong Financial Statements
Having strong income, balance and cashflow statements are critical towards your selection of a suitable Singapore Dividend Stock. Many investors assume that having a good net profit equates to having a good dividend yield. However, having a net profit is not enough. Free Cash Flow is an important consideration for the company for a number of reasons.
Having a net profit does not necessarily give a company cash to declare dividends. The money could be tied up with projects, Research & Development or simply having its cash locked up as receivables. As such, it is not only enough to consider a business’ income statement. Check the the Balance sheet – is your stock pick a cash cow? Cashflow statements are extremely important as well. You can tell that all 3 of the Financial Statements are intertwined and form an overall picture of whether your business is financially sound enough to continue issuing dividends for years to come!
4. How about REITs as Singapore Dividend Stocks
When you are researching on Singapore Dividend Stocks, invariably, the topic of Singapore REITs comes into play.
REITs stand for Real Estate Investment Trusts. Essentially, these companies are prime candidates for Singapore Dividend Stocks because it is a requirement by law for REITs to pay out 90% of their income as dividends every year!
In addition to that, REITs are often viewed by investors as a replacement for individuals wanting to invest in property, with Dividends seen as an equivalent of collecting “rental income”. REITs offer diversification through the multi-property portfolios they own, spreading the rental risk to a varied pool of tenants. REITs also offer certain advantages in liquidity as compared with directly owning physical properties for which the liquidation process involves the long drawn process of putting up a property for sale.
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