What to look out for in dividend investing?

What to look out for in dividend investing?

17 Oct 2021

Income Investing- Introduction

Income investing is one of the most common goals sought after by investors as it gives regular cash flow and higher returns than the normal fixed deposits one can get in banks. In general, we typically recommend those with an investment horizon of more than 20 years (esp those who are in their 20s to 30s) to focus on capital appreciation instead of income investing, as given your strong earnings power and cash flow (from your job), you should let your money compound and work for you!

Nonetheless, for those interested in income investing, do look for stocks that have a track record of paying out dividends or have a dividend policy. 

Some sectors to look at

In Singapore, Real Estate Investment Trusts (REITS) is a highly popular option due to the structure of the REIT which requires the property investment company to payout 90% of their income as dividends. Based on the research by SGX as of Sep 2021, there are 42 REITs and property trusts listed in Singapore with a market cap of more than $100b and an average dividend yield of 5.9%. If you are interested to find out more about REITS in Singapore, you can find more research on them here.  

Other sectors to consider: Some of the sectors tend to have high dividend yields, mainly due to the nature of the sector as they generate high free cash flow. In Singapore, these include manufacturing companies such as Valuetronics, Frencken, and Broadway, and our local banks such as DBS and UOB.

Our favorite pick for now (October 2021): Keppel DC REIT

Keppel DC REIT has been one of the strongest performers among the S-REIT due to its business nature (leasing of data centers). With cloud computing being one of the hottest sectors currently, so is the demand for data centers.

This has helped Keppel DC REIT to rake in a commendable gain of more than 90% over the last 5 years vs STI's of 10%. Year-to-date, however, Keppel DC REIT has underperformed the local index at negative 16% vs STI's return of 9% mainly due to some profit-taking after its incredible run over the last few years. However, this also gives investors to accumulate on weakness for the next run-up.

At its current price of S$2.39, Keppel DC REIT is trading at about 2x P/B with a dividend yield of about 4%.

Source: CapitalIQ (Dividend yield of Keppel DC REIT since 2015)

This is not bad considering the current low interest rate environment and the fact that Keppel DC REIT has grown its dividends by more than 40% between FY2015 to FY2020.

With its recent correction, Keppel DC REIT's dividend yield is also approaching its long term average dividend yield of about 4.7%, after years of compression (due to the price appreciation)- see below chart

Keppel DC REIT's 1HFY2021 presentation slides

Keppel DC REIT's Factsheet

Other things to note

Other factors to look out for when analyzing dividend stocks include

  1. Track record of paying out dividend or dividend policy
    A company which has been paying dividends for the last 10 years is more likely to continue paying dividends to shareholders than one which has not been doing so. This is because a company will tend to try to keep shareholders happy by either maintaining or increasing the dividends. For companies that are new (i.e. recently IPOed or RTOed) they may signal their intentions to give out dividends to shareholders through a dividend policy, where the company pledge to pay out a percentage of their earnings as dividends.
  2. Positive free cash flow generation > Dividends paid
    A company can only pay out dividends over the long term through the cash flow it generated. If a company is paying out more dividends than the cash flow it generates, the dividend payment may not be sustainable in the long term (as the company will have to either borrow or dig into its coffers to pay out the dividends to shareholders)
  3. Dividend payout policy of less than 100%
    Similarly, a company cannot consistently pay out more dividends than what it earns in the long term, as by doing so it will either have to borrow or dig into its coffers to pay out dividends.


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