MCD

Oh Shit! I started DCA investing at the top of the bear market!

May 29, 2012 by Kyith 26 Comments

Investing using dollar cost averaging at the market top may not be that bad if you invest in the right investment and are discipline enough throughout.

In the past week, we written about the advantages of investing in low cost index funds or exchange traded funds (ETF) for people who do not want to take such a hands on approach with investing but want to make the virtues of early life compounding work for you.

In the Singapore context, many have highlighted Street Tracks STI ETF as the ETF that they use when they want to practice low cost index investing. STI ETF since 2002 inception have generated an annualized return of 9% with 38% of the returns originating from dividends. (Read report here)

Meeting up with an old friend

I managed to meet up with a friend of mine that I haven’t seen for some time. I best remember him for being a person unaffected in the most difficult times we faced.

We used to share some conservations on investing and the experience I remember best was his investment in Macdonald’s Corporation (MCD). MCD is the best dividend growth stock perhaps in the past 10 years. Great business model and it starts at a 3% yield but the crazy thing is that its dividend growth for 5 years have been 20%! That 3% basically doubled in 3.6 years.

My friend probably bought MCD at $70 (which at that time I thought it was expensive. ha! anchoring at work!) yielding 3%. The price now is $94.

Buying STI ETF near the all time high

So he lamented that he started investing in the STI ETF. To him it’s a no brainer way of making your money grow with the progress of Singapore.

The problem is that he invest in May 2007. Now when you hear that, your heart may jump out since that is at the very top of the Great Financial Crisis (GFC) that took nearly 60% off the STI index.

Dollar Cost Averaging the STI ETF using Lim and Tan Unit Share Market

Now I found out further that he didn’t just invest at the top of the market.

What he does is

Set aside a sum of money per month
Every month since May 2007 he put $1000 into buying odd lot shares of STI ETF
Doesn’t like to wait for three months then invests

Now he uses Lim and Tan which gives him access to the unit share market. For the readers asking me how to dollar cost average with a smaller sum this may be the way.

My take is that Lim and Tan charges you the same commissions like you trade the full lot, compare to Philip Securities which charges $10.

Price Chart for STI ETF

(Click to see larger graph)

The price where he started investing was absolutely brutal. If I am correct that is the worst market plunge since 1997 Asian Financial Crisis.

Since then, the market didn’t return to the top of 3800.

The price summary shows where he got invested in. The common guess is that my friend suffered large losses even till this date. Even 2011’s high took it back only to 3300.

Total Returns of his Dollar Cost Averaging plan till date

I talked in the past of another friend who stopped his Dollar Cost Averaging plan when he anticipated the bear market. (See report here)

Good choice? That friend still believes in his astute market timing capabilities.

Lets look at this friend’s returns.

(Click to see larger image)

By adding $1000 every month, he put it a total of $50,000 to date. His return for 5 years is 9.24% with 85% of returns made up by dividends. Annualized the return is 1.7%.

His average cost have gone down to $2.80, which was much lower than the $3.10 he estimated.

Disciplined Approach to Investing

What impresses me about how my friend conducted this was that he is not DCA automatically, but every month he has to initiate that himself!

My friend did not let the early losses get into his head to stop him from abandoning his DCA plan.

And because of that it really saved his portfolio because he added a lot of units at $1.60-$1.80 prices which balance things up.

The majority of the returns had been from dividends, and without the dividends the returns would have been even more pathetic.

Share with us!

If you have been investing for some time but have not kept up to date with keeping track of your returns do contact Drizzt at [email protected]tmoats.com if you would like me to profile a stock or a portfolio this way.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

Macdonalds $MCD correcting. Dividend Income Investors should take note.

January 7, 2011 by Kyith 5 Comments

Macdonalds have been a favorite dividend stock of many investors because of its strong business model, reasonable prevailing yield and its dividend sustainability.

MCD is a member of the S&P 500 Dividend Aristocrat
MCD since 1976 have increase its dividends for 34 years
No negative free cashflow
Dividend payout is less than 60% of earnings
Dividend growth is increasing
Current Dividend yield at this juncture is 3.29%. International dividend investors should take note that factor in 30% withholding dividend is 2.3%

Interested investors should wait for a change in price movement to add on exposure. But of concern is the high volume sell down. Good readers could update me if there are any big negative news.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly here.

How to calculate dividend withholding taxes on US ADRs for international investors: My experience with Telefonica

December 12, 2010 by Kyith 39 Comments

Not too long ago I wrote about being invested in Telefonica as an experiment to see how much I will be tax as a international investor investing in US ADRs and how much taxes I will be levied with.

To recap:

There is a 30% withholding tax on dividends of US Stocks listed on US Stock Exchanges. Last I checked, there is not many ways you can bypass this.
The withholding tax currently for Spain, where Telefonica is from is 19% as of this posting (Dec ‘10).This was raised from 15% in Jan 2010 if I am correct.
We do not want a situation where our dividends are first taxed 19% at Spain and then 30% more in US before giving to us.

I invested 50 shares in Telefonica at a price of USD $61.23.

No of Shares: 50

Purchase price (USD): $61.23

Exchange rate then : 1:1.40 (Yes its terrible)

Total Cost (USD): $3061.00

Total Cost (SGD): $4285.00

Latest Half Yearly Dividend Declared (USD): $2.700750

Total Dividend (USD): 2.700750 x 50 = $135.0375

Total Dividend Received in DBS Vickers Account (USD): $108.38

Exchange rate now: 1:1.32

Total Dividend Received in DBS Vickers Account(SGD): $143

Total Withholding Tax Levied: 1-(108.38/135.0375) = 19.7%

Yield on Cost Based on US Cost before withholding tax: 2.70075/61.23 = 4.4%

Yield on Cost Based on US Cost: 108.38/3061.00 = 3.52%

Yield on Cost Based on SGD Cost: 143/4285 = 3.33%

So what can we drawn from this?

1. The only withholding tax you have to content with is the Spanish Government’s withholding tax of 19%

The dividend declared of USD 2.700750 that you see in google finance is before taxes. For US investors they need to deduct this 19%. For international investors like me in Singapore you need to deduct this 19% as well.

2. When investing in ADRs, different countries withholding tax matters in buying decision

What this means is that if you invest in a stock in Holland or in Brazil you are subjected to that government’s withholding tax rate.

It can be quite a hassle. Is it worth it?

3. Yield on Cost gets severely affected by withholding taxes

The yield on an annual basis was 8.8% for a stable growth stock. This gets cut to 7.04%. For Telefonica, 7% looks to be still respectable, but in theory the bigger your dividend yield the bigger your heartache.

For 20% withholding tax rate:

12% becomes 9.6%
8% becomes 6.4%
4% becomes 3.2%
2% becomes 1.6%

For 30% withholding tax rate:

12% becomes 8.4%
8% becomes 5.6%
4% becomes 2.8%
2% becomes 1.4%

4. Look for dividend stocks that grow increasing payouts

So if you are looking for dividends from US stocks and ADRs, my advice is that don’t make that your primarily target.

The opportunity cost of buying a US Dividend Stock is a Singapore one and at Investment Moats, on my Dividend Stock Tracker, the average yield is from 3.5% to 9% at the moment.[Check it out here >]

So why go international or US centric? One reason. For the past 10 years, you cannot find one Singapore stocks with good fundamentals that can increase its payout consistently.

They either end up at the same point or their payout goes up and down.

Around the world, we can find stocks with

great fundamentals
wide economic moats
raise dividends for 20-50 years

Your yield can start from 2% but at a different growth rate your eventual yield on cost could be 15% by the time you require.

At the end of the day, we do not invest in dividend companies, we invest in business that

grows against inflation
generates solid cashflows
innovative and proven track record (Macdonalds, INTEL, Abbott, Pepsi)
up and coming dividend growers (Cisco, Total SA)
at good valuation vs cashflow generation potential

For more into this check out the dividend aristocrats,dividend achievers and dividend champions here.

Stock Valuation and Dividend Sensitivity Analysis:How does price and dividend affect each other?

May 8, 2010 by Kyith 14 Comments

Data on this article can be found in the Google Spreadsheet here >>

Introduction

When you sometimes buy a stock for dividends, you look only at the current yield of the stock and take it for granted that it is like a fixed desposit where the interest rate fluctuates little.

The common psychological thinking is that the stock IS EXPECTED to maintain the dividend payout, but that isn’t usually the case.

Dividend per share per year (DPS) fluctuates.

In a growth company, what start off as a small DPS relative to share price might grow and grow so much so that its dividend yield is eventually higher or equivalent to some stock that pays high yield. MacDonald’s and Pepsi comes to mind. Their dividends just grow and grow for 20 years plus. Great investment.

In a mature company, the dividend payouts tend to fluctuate. When business is good they pay out more than average, else they pay out less. In Singapore, most of the companies such as UOB, DBS and SembCorp is like that.

Then you have your dividend companies that you buy for its consistent cashflow, companies such as Telcos, Utilities, REITs, MLP. Their DPS is consistent and makes then easy to value. A trend that we see is that these companies find it very difficult to value create and grow their profits and cashflow with the existing resources.As such DPS tend to stagnate or in difficult times go down. So what start off as a high yield at your purchase price ends up big very small.

For stocks that consistently pays dividends more or less, their share price will reflect the expectations of investors and this affects you as an investor both trying to get in or already vested in the company.

Case Study: Starhub

I decide to use Starhub since it is one of my vested holdings and recently they announce a first quarter results that is less than satisfactory [Report here >>].

Starhub is a telecommunications company based in Singapore and listed on the SGX. The dividend guidance given is that they will maintain a minimum DPS of SGD $0.05 per quarter or SGD $0.20 per year.

Based on my highest purchase share price $2.37, $0.20/$2.37 comes up to 8.4% yield on cost. That’s not a bad yield, since I bought Starhub after understanding that telecommunications stocks’ business economics enable them to generate consistent operating cashflow which makes dividend payout predictable.

At an EV/EBITDA of nearly 6 times, the valuation looks just about right.

For stocks like this we don’t expect much surprises, but history have taught us that companies that have all the while generate consistent earnings will faced business pressures that changes the profitability of what you might once evaluated as strong. Competition, Substitutes and Mismanagement are some causes of this.

Starhub’s results in the first quarter resulted in the profits being halved in the first quarter. This impacts the operating cashflow and makes investors question whether they can pay out the SGD $0.20 dividend.

To make understanding easier i have come up with 2 Dividend Sensitivity Tables found on my Google Spreadsheet under Dividend Sensitivity.

So currently at SGD$0.20 payout, the actual dividend payout on Starhub’s cashflow statement is SGD $342 mil. You will see here my purchase price is somewhere between 2.30 and 2.40.

How does Starhub’s weak operating cashflow affects the dividend? In the case of most dividend stocks that $342 mil is paid out from Operating Cashflow after spending on Capital Expenditure. So a smaller Operating Cashflow due to cost of goods sold increasing or an increase in capital expenditure would mean that Starhub will have difficulty in meeting that $342 mil.

What this first table here shows is that if the operating scenario persist, Starhub might have difficulty meeting that minimum dividend guidance. They would have to lower that DPS if they want to maintain good practice.

Using this table, we will see that when DPS is reduced from $0.20 down to $0.16, the yield on cost for my $2.37 purchase fall to 6.67%. Hey 6.67% is still quite good isn’t it?

A reduction of payout to $0.16 cents which is around $0.04 per quarter represents a 20% reduction in dividend payout and a much much more conservative amount to give out. At $342 mil they can barely make it this year 2010. And likely they would have to pay out from their existing cash holdings or get bonds and debts to fund this.

The market’s demand for a specific yield

But lets say that you die die want around 8% yield. Your choice as a rational investor will be to sell this stock and buy another one yielding 8%.

In a certain way you will see the market react accordingly to this yield that they want. For the kind of risk I invest in Starhub, I demand this amount of compensation. And if Starhub is unable to provide that amount of compensation in the form of dividends, the share price theoretically have to be adjusted downwards to meet my 8% yield that i demand.

So on the next day of the earnings release, coupled with the market turmoil the stock have gone downwards. I believe word got out even before that that’s why 2 days ago there was a massive sell down already.

For an investor looking to add to current holdings or an opportunistic investor, how far can starhub fall?

Here we have the second table, a slightly different table. We have the yield you demanded, or market demanded, depending on how you look at it versus the difference in DPS.

So in our case, if the current DPS is $0.20 and the market demand is around 8% yield, the fair value now should be $2.50, which is higher than what i paid for.

So when we received news like the profits are affected, the market is thinking that Starhub cannot pay that $0.20 anymore. The DPS will have to go down either to $0.18 or even as low as $0.14, the market doesn’t know but the market is taking it that its going to be lower.

So currently the share price is around $2.15, one way of looking at it is that the market is taking it that Starhub can safely pay $0.17

The values thrown around by brokerage houses downgrades were SGD$1.88 to SGD $2.00. If the market demanded yield is 8% then the market seems to be saying that the safe DPS is around $0.15 to $0.16 cents.

You guys can play with the permutations accordingly all day. Probably can use a demand for 9% yield and if you need to find out how much is $0.14 DPS on balance sheet check out the previous table in my spreadsheet.

Valuing on the upside

You can also view it the other way round. Lets say the market demand is 8% yield and they are currently paying $0.16. So if Starhub increase its dividend payout to $0.22 cents, it will mean that the supposed fair value is $2.75. depending on what is the current share price, you can judge roughly whether the stock is under or overvalue.

The problem with valuing it this way

The problem is that the market yield demanded is unknown and can vary. It is to me a perceived number that the total market participants are looking for. So it could be 8%, it could be 9%.

This form of evaluation is best used as an estimation.

How i would evaluate Starhub at May 2010

While i don’t know how the full year operating cashflow will turn out we take it that there will be a revised down of operating cashflow. Capital Expenditure will be 14% of operating revenue which should come up to SGD 300mil.

To pay out the current $0.20 it will mean that operating cashflow need to be $300mil + $342mil = $642 mil. Divide by 4 and its $160mil which is roundly the operating cashflow this Q1.

They are barely able to make it.

A $0.18 dividend will mean a 10% reduction in payout and $0.16 a 20% reduction. This year i fully expect 20 cent dividend since the guidance is given. But should competition be as tough as now and not abiding, a revised payout to $0.16 might be more conservative.

At current price of $2.15 the payout this year will be around 9.25% which is darn good. A future reduction in payout if you buy at current price will be around 7.40%. Which is pretty good and above average as well.

Even if you take dividend payout all the way down to $0.14 the yield is around 6.50% which is still higher than SingPost, Parkway Life REIT which are the safe stocks.

So if you are holding this stock, evaluate the sustainability of operating cashflow, whether a telecommunication stock like Starhub can pay a reduce operating cashflow of $570 mil.

The problem is if you are trying to add on how low should you wait for? The brokerage houses are throwing numbers like $1.90-$2.05.

Most likely every one is looking at a market demand yield of around 8-9% and a 10% reduction in DPS. In that case should the DPS be $0.18 the share price is either $2.00 for 9% or $2.25 for 8%.

Currently we are at $2.19 so a market demand of 8% and $0.18 DPS looks likely. This shows that if mkt demand is 8% we are fairly value at $2.19. But if its 9% they are demanding Starhub needs to fall until $2.00.

So that is another 10% fall. In recent times, the strongest support or low have been $1.88, which is right around what the brokerage houses are touting.

The 200 day MA is at $2.14 so if you are planning to hold this, when it gets down to $2.14 is a good time to add, if it goes down further, I would advise to wait for it to turn up before adding.

As a current investor if it breaches $2.14 you might want to play it cautious according to your rules as what is good might get cheaper. you might want to look at lighten your Starhub holdings and add it below the 200day ma when it turns up. It has shown that when the 50day ma cutting the 200day ma to the downside, it is quite longterm bearish.