Focus on low payout, high dividend income stocks with good business models Skip to Content

Focus on low payout, high dividend income stocks with good business models

I used to not look past anything that yields less than 4% dividend. For me they are unappealing and not being able to pay a lot of dividend indicates that they are higher risk than the usual high yielding dividend stocks.

Well my exercise with Keppel Corp (read here) and Noble Group (read here) indicates that chasing for dividend yield can be dangerous for your portfolio long term

  1. Some stocks pay high dividends to attract you at the expense of growth. They usually pay out > 80% of their profits or free cash flows. There isn’t much left to grow if the opportunity arises
  2. Most dividend investors would love stable predictable dividend payouts that are uniformed. Due to the business nature, some stocks like Keppel can pay out special dividends. Looking at a 10 year time frame those special dividends do add up as well
  3. Dividend Stocks pay out of cash flows and that should be what investors focus on. A business that you can predict that to have a good 10-20 years in the future, generates a growing cash flow, no matter how lumpy the dividends are a good stock.
  4. Your future high yield dividend stocks will have to start from somewhere. My Stock Factsheet illustrates Kingsmen, Boustead, Adampak and Challenger that started off yielding not much but grew their dividends to the point where a low yielding stock become an ultra high dividend stock for the people still holding them
  5. Focus on the dividend payout. A balance dividend payout of 50% will enable the company to have enough to save for rainy days, expand their business, yet duly rewarded. Kian Ann as an example pays out roughly 5% yield on a 25% earnings payout. Which means their free cash flow would have enable them to pay out 20% yield.

The best stocks are those

  • a sound business model for the next 10-20 years
  • shows evidence of increasing their dividend per share or special dividend
  • shows evidence of shareholder oriented
  • well managed payout ratio
  • > 4-5% yield
  • beaten down for the wrong reasons thus at attractive valuation

Those are very difficult criteria and if you managed to find a stock or some stocks like that I humbly hope that you can share with me!

Sembcorp Industries

A good example is Sembcorp Industries (SCI). I was at the Hardwarezone Stocks forum when I notice many don’t seem to regard SCI as a dividend stock.

Perhaps its because it currently only yield 2.95% to 3.34%. The Fact is that SCI have been paying dividends for each of the past 11 years.

(Click to view larger table)

If you had bought SCI in 2002 your purchase price would be $1.70 then. Your initial dividend yield would have been a paltry 1.76%. The next year a mediocre < 4%.

But SCI is at the start of the shipping and offshore marine boom. SCI owns 60% of SGX listed Sembcorp Marine.

Your total returns would have been 278% since then with 78% coming in the form of dividends.

Your yield on original cost for that $1700 would now be a regular 6.4% to 8.8% yield with an occasional special dividend bump.

Conclusion

Perhaps Sembcorp isn’t at the right price now but who knows? Sembcorp is moving aggressively to build up their utilities division. Chances are that is going to make their dividend payout more consistent. Your current 2.95% yield could be bump up to 5% with growth coming from offshore and industrial venture.

My brain is hard wired to accept high yields but there needs to be a bit of reprogramming done to switch to watching good quality business, growing cash flow, good share holder returns and balanced payouts.

Anyone spot a stock that fits my criteria recently?

I run a free Singapore Dividend Stock Tracker . 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.

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BfGf Money Blog

Thursday 5th of March 2015

I am starting to restructure my portfolio so that I have dividend stocks for defensive measures due to my unstable income, and long-term growth stocks for capital gains. I have long underestimated the power of a dividends stream. (For e.g, dividends give you more cashflow to buy stocks during crisis/opportunities, whereas for those long term gainers you can only hold and pray.)

I have bookmarked this page for further reading!

Kyith

Thursday 5th of March 2015

thanks BFGF, if your aim is to supplement your income for expenses then dividend is a good thing. if you are getting the div to reinvest it, then perhaps just focus on good cash flow growth attractive business.

lewis

Sunday 13th of October 2013

Hi, I like this post. I have seen you trackers and found many reits. I heard that reits will encounter rights issue and you have to buy if not your yield will be diluted? Is that true? How do you manage that to maintain steady yield in long run?

lewis

Sunday 13th of October 2013

Hi, I like this post. I have seen you trackers and found many reits. I heard that reits will encounter rights issue and you have to buy if not your yield will be diluted? Is that true? How do you manage that to maintain steady yield in long run?

Kyith

Sunday 13th of October 2013

REITs pay out 90-100% of their cash flow and as such when they need to make acquisitions it has to come from debt or rights issue.

the acquisitions have to be long term yield accretive.

end of the day you have to buy a good price for a reasonable company. the difficulty is valuing it

Drizzt

Sunday 8th of April 2012

for someone so affiliated with ST i cannot comment much but ST traditionally payout 100% or earnings for 4-5%

Jay

Sunday 8th of April 2012

I'm wondering if ST Engineering fits the bill?

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