At 30 years old, I had 6 years of investing under my belt. 

But my returns was heading nowhere. One of the main reasons was that I was trying a lot of different things. So I told myself, its time not to mess around anymore and try one method that I feel goes best with my character. Then I doubled down on it.

I lean towards investing for dividends. And what a friend said about respecting value makes sense. 

So I doubled down on value investing with a focus on finding dividend paying companies. 

I been doing that since then, and regular readers would know where to check how I am doing. 

Why Investing with a Tilt Towards Dividends?

Dividend investing has a lot of appeal, and I think the reason is that people likes to be validated that they are slowly getting a cash flow payout from their investment.

This has a lot of similarities to the Asian concept of owning land and leasing out to farmers to grow crops and living off it. It is a very passive form of income.

At this stage of investing, I wouldn’t compartmentalize the way that I invest to be called dividend investing. I prefer to call it active stock investing simply because I invest in stocks and I take an active approach.

However, the role of dividends plays a big role in my consideration:

1. It is the cash flow return that I get for waiting for an undervalued stock value to be realized. One good example are the cash flooded company Cosco Shipping International in HKSE. They have been in that position for quite some time and you don’t know if value is going to be unlocked and when will that happen. Having a good payout and a supportive business allows you to stay in the stock
2. It helps you to inspect if the business is more of a fraud or less of it. This is simply a measure of how much the management takes from the minority shareholders versus what they paid out
3. It enables you to determine the valuation. When compare against the peers, it allows you to determine the stock’s relative valuation versus its peers
4. It allows you to determine its posture between growth and maturity

Perhaps the main difference is that I use the dividend payout as an indicator, as well as a cash flow remuneration while you are attracted due to its cash flow payout.

There are Dangers if you are Less Sophisticated on Dividend Investing

There can be a particular danger if you are enamored with the dividend component. If I need $20,000/yr, I could just put it in Asian Pay Television Trust (APTT) and I would only need $200,000 to achieve that.

There are some deeper knowledge that, if you didn’t know that you need these knowledge, it could be dangerous. And that danger can very well be an impairment of 20-30% of your capital. This will be difficult to gain back when the cash flow do not support the dividend payout. It will take many many (and I say many) years to recover.

On $200,000 that is $60,000 impairment.

The price chart above shows the 3 year price change of APTT. Observe that at IPO, in 2015, or as recently, if you have invested at these period, your initial dividend yield will be damn appealing. They would fulfill the income you need. 

However, overtime, the share price goes on a tailspin. While the prevailing dividend yield is always attractive (and even after this plunge it is attractive as well!). You would have lost a lot of capital while you gain dividends. 

Is this how dividend investing suppose to be? I would say dividend investing can be volatile, but if you are more sophisticated, you can avoid some of these companies. If not, a more sophisticated dividend investor would bite the bullet and escape this. 

Look through my past transaction logs and you would see I was invested (not just APTT but in its original form MIIF). I am also human. But increasing our competency can help correct some of these mistakes.

These are not scary case studies that only occur to a small subset of people. As I have written about this in a previous post, APTT and Rickmers case study is common, attractive and can turn out to be rather unfortunate.

It is not all doom and gloom. 

Sophistication allows you to spot companies that pay out a decent dividend yield, yet has the ability to grow their dividends.

Chip Eng Seng Growing its dividends

What you see above is the historical price chart of Chip Eng Seng, a construction company, which eventually went into property development. It might not be the ideal dividend stock but you can see yourself prospecting a stock like this and get invested in 2005 based on a 6.5% dividend yield per year. Over time, its earnings expand and they  pay out more dividends. The annual dividend yield on your original cost became 12%, then 15% then 34% then 52%!

Who says if you go into dividend investing, you forgo growth?

If I were to summarize, here is the high level solution:

Focus on having a good dividend investing system.

By that it means:

1. having good processes to prospect stocks, be able to tell whether a stock is a good dividend stock, a mediocre low growth but sustainable payout one and plain bad, unsuitable ones
2. continue to learn and polish your dividend investing craft
3. having a good system when you should buy, how much to buy, when you should hold or sell, when you should add on (basically portfolio management and execution)

And this brings us to Dividend Machines.

Dividend Machines Reopens

If you wish to learn from me, you can take a look at my resources section.

It contains curated resources on:

1. Building a good wealth foundation
2. Learning about REITs
3. Active Stock Investing
4. Financial Independence and Retirement

These are usually not very comprehensive since I don’t kill myself to create a bunch of modules for you guys.

If you wish to learn about dividend investing, there are a few training centers that offer affordable classes.

One of them is Dividend Machines offered by Fifth Person.

My friends Rusmin and Victor started this course some time ago, focusing on providing the necessary resources for investors who wants to invest in dividend stocks to be well equipped to deal with that.

The course is conducted in an online manner.

There are 5 modules that brings you from a raw investor to one who knows how to systematically prospect stocks for dividends:

1. The first module gives you an idea the appeal of dividends and why you should invest this way
2. The second module is important. It lays the framework that this way of investing is not unlike any other investing in that it requires you to have a good wealth foundation in order for you to succeed (and many just jump straight into investing oblivious that these aspect are important)
3. The third module goes into the nuances of investing in dividend stocks, according to Rusmin and Victor. Here they lays out their idea how to select the stocks, what to watch out for, why do they prefer some metrics over the others
4. The fourth module goes into the Mumbo Jumbo of REITs, which happens to be a popular subject.
5. The final module ties everything together and shares with you how to manage the stocks from a portfolio perspective. You will learn about how much dividend stocks you should have. You will learn about how heavy you should concentrate or whether you should do that at all. And whether you should do margin financing on your dividend stocks.

The curriculum is online, which means you do not have to rush to classes when your boss wants you to work longer. Or when your children suddenly fall sick.

It is more flexible for the modern employee.

Questions & Answers and Discussions

The best way to learn is to clear your doubts.

As you critically think what is right and what is wrong, you have more doubts.

As you get each of these doubts addressed, you will gain confidence in how you an go about executing a plan to create a dividend portfolio.

In the platform, you can access to Rusmin and team who will answer your query. Here are some examples:

Rusmin answers some nuance questions on computing Price to Book

You can also grow by paying attention to what your fellow trainees queries and the answers to them. Sometimes you do not know what you need to know. So when your fellow trainees raise a question and you come across it, you become conscious about it. 

Have Unlimited All Access Workshop

I realize from my friends that people still prefer the human interaction.

While technology can provide such an advantage to make learning interactive and flexible, people still prefer to interact in a face to face manner.

Dividend Machines will organize all access workshops. In these workshops, you can hear the trainers present their recap on course materials, what you should focus on, and some common mistakes.

You can also get the chance to talk with the trainers and revisit the curriculum.

It is a full day event where you can interact with trainers, who will revisit the action plan. The trainers will highlight certain more important nuances of the action plan that you might missed out (if someone keeps repeating something, it might sounds lame, but its probably important enough to keep repeating!). You can also ask them what you are unclear about.

In 2018, Rusmin and Victor hosted 8 such sessions last year and if you are a Paid Member, you have access to these workshops.

Here is their list of upcoming LIVE Workshops available to members who signed up or existing members who wishes to refresh their concepts

However, these workshops is on a first come first serve basis so when they are available do register them early.

Dividend Machines is Now Open for a Limited Time!

You can sign up for Dividend Machines here through this link >>

As with past Dividend Machines, you can only sign up within a limited duration. On last count you should have 20 days more, as it will close on 10th Mar, 11:59 PM.

During this time frame, you can enjoy the course fee of US$347 (SG$469)

Given that you pay this one time fee and have access to content that will be updated annually, and that have access to trainers virtually and live, this is a very good deal.

And if after 30 days you are not satisfied with how the course turned out, there is an iron clad Money Back Guarantee. This gives you a piece of mind to sign up.

Guys some of the links above are affiliated links. When you click on the links, I earn a commission at no additional cost to you. I believe you will gain value out of Dividend Machines if that is what you are leaning towards in terms of wealth building at a good price range. In any case, I am part of the Q&A group in Dividend Machines as well. Let me know the feedback for the course so that I can improve the recommendations.

Keppel Infrastructure Trust (KIT) is the merger of K-Green and Cityspring in the past.

K-Green is very clean, no debt but its assets are concession based and the highest contributing had a concession of 10 years. Cityspring turned out to be 50% leveraged and didn’t performed as what retail investors thinks it should.

Worse, they made an acquisition in Basslink in Australia that was nothing short of a disaster.

So the merger of K-Green and Cityspring helps both sides, in that it gives the entity a “longer WALE” and less leverage.

KIT just announced that they are proposing to shareholders to acquire IXOM a chemical specialty company in Australia from Blackstone Group for A$1.1 billion dollars.

The transaction itself is not going to be very yield accretive, given any of the financing methods.

However, it does help the business trust reduce its dependency on some concession based source of cash flow. But it does not hid the fact that there are some returns that are based on return of capital then a return of capital.

KIT does present itself with an attractive 8.1% dividend yield.

It will leave KIT with a net debt to asset of 41%.

Acquisition Price do not look Overly Expensive

The first thing that I noticed is that at 8.2 times EV/EBITDA, this acquisition does not look too expensive. And given that it looks like a perpetual business, it looks an investment that I am more willing to fork out money for, as a shareholder, rather than one that is a limited concession again.

Then again, shareholders of KIT is not getting any bargains here as well, as majority of the peers are trading at a mean or median valuation close to them.

Buying form a private equity group, who needs to hit a hurdle rate of return, often does not sound like you can get a good proposition so I am not sure why Blackstone Group would wish to sell Ixom.

Back in 2014, Blackstone group acquire what would be Ixom from Australian mining and explosive company Orica for A$750 mil.

Ixom became their cornerstone investment, in their venture into Australia.

Orica, had a motivation to sell because they were facing some challenges in their core business and selling the chemicals business (which became Ixom) would allow them to do a massive share buyback.

It has been almost 4 years since then, and Blackstone was shopping Ixom around for at least A$1 bil.

This sale would have netted them 10% CAGR.

I do wonder how recurring this business is. I do like that its a capital intensive business that might not be so easy to replicate.

Ixom is:

1. Sole manufacturer of liquefied chlorine in Australia from what management estimates
2. Number 1 chemicals manufacturer and distributor in Australia and New Zealand
3. Number 1 distributor of manufactured caustic soda in Australia and New Zealand

The chemical products are mainly used in treatment of water, as well as specialty chemicals in a few industries. Their customer base is wide such that no one customer makes up more than 6% of their income, well spread out among the industry.

And since their customer consistently need these chemical supply, they need an infrastructure base to make, store and distribute. This is not easily to replicate.

Cash Flows might not be that steady as we think

In KIT’s acquisition slides, KIT listed the past EBITDA trends. Since Blackstone took control in 2015 and made this their cornerstone Australian asset, the EBITDA growth was 5%/yr.

Per Australian financial review, potential buyers was told Ixom would be making A$133 mil in EBITDA in 2018 and A$139 in 2019.

Now I wonder whether the EBITDA or EBIT would spring some surprises down the road.

I do not have an issue finding out the nature of the cash flow prior to 2015.

I just need to take a look at Orica’s annual report.

I have gone through the report and tabulated some of the financial data. There were a few periods that gave me some grief as the EBITDA looked funny. 2007 was the year where management decided to combine their specialty chemicals Chemnet into the chemicals segment. In 2013, Orica reclassified the chemicals in mining from chemicals back into their mining segment.

From the data that I see, it is not as if the mining chemical outperformed the other chemical business. I think this is because they do see that aspect of the chemical business to still be strategic in their service delivery.

If we focus on the EBIT and EBITDA the red cells mark the years where there is a decline in EBIT and EBITDA.

Coincidentally. it was 3 years before they sold off to Blackstone group. 2014 saw a big plunge but I feel that my data could be “tainted” by some one off write downs because another source showed otherwise.

From 2004 to 2011, we are able to see the data where Chemnet and mining chemicals was integrated. While revenue was very very stable, there is somewhat some growth in the EBIT and EBITDA.

It is also interesting that during the financial crisis, the business was pretty stable.

Business was not well from 2012 to 2014, and that might make it a rational decision to sell the chemical segment off, take the money and use it better.

But I do wonder, is it that Blackstone is just a better manager than Orica and therefore they can achieve a much splendid CAGR the past 4 years?

This would mean that if Keppel could not keep the management, they would really need to dig within their own resources to find a management team to keep this up.

The following are snippets taken from operation review, during those years where things were challenging. I hope that this would add some color to the nature of the business:

2006

Chemnet profitability down 26% due to ongoing difficult trading conditions. Restructuring program commenced in April 2006.

Sales down 4% due to slower conditions in Australia and New Zealand. EBIT declined due to lower volume. Key customers carried out aggressive cost cutting, including direct sourcing some of their materials. Bronson and Jacobs lost volume and market share.

Chemical services sales was up 13%, if we exclude acquisitions due to strong performance from mining chemicals.

Watercare have strong sales growth due to high caustic soda prices. However volumes was down due to lower industrial consumptions.

Mining chemicals volume was up 28% due to growth in gold productions. Pricing improved due to lower margins but higher volume.

2013

EBIT was down 8% due to subdued conditions in most industrial markets in Australia and New Zealand and increase competition. General soft demand in Australian construction, manufacturing and agriculture industries.

Performance improved in the New Zealand chemical business. Growth in Latin American construction markets and improved sales of industrial chemicals.

Watercare sales lower due to lower global caustic soda prices and increased pricing pressure from competitors.

2014

EBIT down 29% due to write downs and restructuring costs of  the Latin America. General Chemicals Sales is down 6% due to lower volumes from mining, agricultural and plastics sector in Australia and reduced revenues in Latin America. New Zealand sales improved due to increase demand in  dairy, pulp and paper sectors.

Watercare sales is down 9% due to reduced demand in global caustic soda pricing which stabilized at lower levels.

I think we do not see large one time capital expenditure and depreciation is rather stable.

While I have highlighted the downside in EBITDA volatility, you could also see that potentially, cash flows could grow as well.

Summary

I think that is a lot of work just to understand whether a purchase is good or not.

However, I am glad to do this as I always thought chemical business is damn volatile. However in the case of Orica’s data, the cash flows can go up and down, but due to their advantage as stated, their cash flows are rather recurring.

The method of financing have not been finalize but I thought the dividend yield is rather attractive at 8.6-8.7% post PO or rights issue.

As a package, I think there is a reason why KIT is trading at a high yield:

1. its gearing is rather high
2. while many of its assets are recurring but their cash flows can be volatile
3. as explained, part of their assets have limited concessions

A fair dividend yield for this should be at 8% for the nature of this business. While I think it is undervalued, I think there are other things that are undervalued as well. So pick your high yield investments carefully.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free

I received 2 questions on dividend investing and cash flowing for financial independence question and I would try to address them here.

These questions were sent to me as part of my organizing Investors Exchange 2018. And while I am not always in the best position to answer, I will try my best where I can.

Its even more awkward when the questions are on my friend B‘s The Evolution of Dividend Strategy presentation.

So here are the questions:

1. Brian Halim’s strategy is to buy stocks with 6% Dividend and 4% Growth. Over what period is the 4% growth measured? That 4% will be past performance right?
2. Brian Halim achieves FI when his dividend income matches his expenses. However his portfolio is 100% stocks. During an economic downturn, dividends might be affected. How can we handle that? If we switch to safer assets like bonds, the yield might not be high enough to match expenses.

The 6% Dividend and 4% Growth Model

Think during the presentation, B shared with us how he frames and pigeon hole the companies that gives out a dividend into any of these 5 segments.

And then he shares their characteristics and one example on them.

The one he prefers the most is the 6% dividend and 4% growth strategy.

The growth in this case can refer to many things but in my opinion it has to be capital growth. This means that the net asset value of the business grows at roughly 3-5% per year.

When the net asset value grow, usually the share price will follow. (If it doesn’t then perhaps that stock is undervalue).

The other way is that the share price, or market capitalization grows at an average of 3-5% per year.

This is almost the same as my previous net asset value explanation. It just skips the net asset value, in that the market accords the stock to trade at a consistent 6% dividend yield.

If you look under my Dividend Stock Tracker, you can find that there are many stocks/REITs that currently gives a dividend of 5.5%-6.5%.

Let’s take the example of Ascendas REIT. It is a real estate investment trust, the biggest in Singapore that owns a lot of industrial properties in Singapore, Australia and now UK.

Its share price is $2.75 and the last dividend per share is $0.162.

So this gives it a dividend yield of $0.162/$2.75 = 5.89%.

According to B’s model, for Ascendas REIT to fit into this, it should grow at 3-5% and it is possible through a combination of:

1. filling up the vacancy in a cyclical growth scenario
2. acquisition
3. organic rental growth
4. asset enhancement

So suppose that you hold Ascendas share today at $2.75.

Come next year, Ascendas business did well and they were able to bump the dividends up by 10%.

So the  dividend per share for next year is $0.162 x 1.1 = $0.1782.

Your yield on cost would be $0.1782/$2.75 = 6.48%. That is a pretty good dividend yield for a quality portfolio, big sponsor and quality management team!

However, the price usually won’t stay at $2.75, if the dividend is able to improve by 10%. The market participants will buy and sell, buy and sell and eventually the prevailing share price will make Ascendas REIT trade at 6% dividend yield again.

Since the dividend per share now is $0.1782 and to make Ascendas REIT trade at 6% again, the share price would need to be $0.1782/0.06 = $2.97.

So how much did the share price change? ($2.97-$2.75)/$2.75 =  0.08 or 8%.

So you get a 5.9% dividend yield and a 8% capital growth.

Is Ascendas REIT always going to trade at 6%?

Not always.

We can tell this if we track Ascendas REIT’s historical dividend yield.

The above forward dividend yield graph is taken from a CITI analyst report.

We observe that over its 15 year history, there are times when the mean is closer to 6.2%, sometimes 6.6%.

The market does not always value Ascendas REIT on the spot, but would gravitate back and forth to it.

The market valuation of Ascendas REIT will always change as the REIT’s quality changes:

1. Improvement in portfolio of properties
2. Improvement in management
3. Changes in the risk free asset rate. If Risk free asset is more attractive, that would affect Ascendas valuation
4. Investor sentiment. If investor is panicky, then it might not always be this band

So this is how growth or deceleration happens. The gyration of dividend per share and the share price. 2 items that are affected by business fundamentals (dpu) and market forces (share price).

Is the Growth Past Performance?

The answer here is no.

It should be forward looking and into the future.

This is because why would we be investing in the past? We should be investing in the future.

Thus B’s 4% is based on his analysis of this particular business, how its growth trajectory is likely to be in the future.

To find its future growth, we have to look at the past performance to understand its nature.

That is not enough.

You have to look at the market in general going forward and mesh the past and market together.

In Ascendas case, real estate goes through period of boom and bust, and because the properties are in different geographical regions, we have to see the near term or far future of 3 different markets (Singapore, Australia and UK).

If we want to position for 4% growth, these markets, their production manufacturing, should be good. Otherwise why would we put money in an investment where in the past it shows that it grows 4%/yr but in the future the growth is -2%/yr?

B: A Quick and Dirty Way to Forecast Forward Returns in the Near Term

Probably what was lost in the translation while I was typing this reply out is that each of these 5 dividend strategies allow you a quick and dirty way to pigeon hole the likely return of the company in the near term.

The idea is that, you do not know what kind of total return you are going to get. You pair a sustainable, recurring dividend, with the appropriate near term growth rate.

This growth rate can come in different ways on inspection:

1. The existing GDP growth, country production growth as an organic baseline growth rate
2. Increase in orders, sustainable margins over the past year
3. New asset purchases that will increase recurring cash flow that is not factored into the news
4. Potential fix to long standing problems

If you can approximate the revenue, the margins and the cash flow, you can see the bump up.

Thus it lets you see whether the stock is priced reasonably for the risk and for speculation.

Ok this concludes my answer to the first part. Got to get to work.

Let me know if you have any queries.

My consolidated resources on:

1. Wealth Foundation
2. Active Investing
3. Investing in REITs
4. Dividend Stock Tracker
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money