Striking the football with two legs, not one

Several days ago, The Straits Times published an article entitled “Singapore stocks pay best dividends across Asia”. Indeed it is true. Even with the current market run-up, many blue chips companies have been paying a nominal dividend of about 3-4% at today’s market price. Should one had bothered to explore further and bought into an undervalue stock some time ago, the return could have been much higher offering both capital gains and good dividends such that one would not even bother to sell them. A lot of these shares could even displace high-yield instruments like REITs and perpetual bonds that offer a yield of around 5%-6% on average. While REITs and perpetual bonds offer comparatively good yields for investors, they do not have much buffer in terms of liquidity. REITs, for example, have to distribute 90% of their income to avoid the corporate tax. When there is a credit crunch or when there is a need for funds, they either have to sell off the properties or to raise funds by issuing rights.

 

As pointed out in the last post, many investors got into stocks were partly because the interest offered by banks had been too low for too long. So, buying into REITs and perpetual bonds appeared to be no-brainer due to their high payout. Hopefully somewhere in the future, they are able to recover their investments through the dividends they received…..the higher the better. (See Figure 1) The setback is that when the interest rates start to perk up, these investments are likely to be beaten down more drastically. This could result in capital loss, thus offsetting the higher dividend payout.

  

Stocks tend to have more leeway when comes to dividend distribution. Usually the payout is in the region of around 35-60%, depending on the discretion of the directors. There is usually more room for paying out higher dividends when the company has no urgent need for funds. They could even tap into their cash hoard should there be a need for expansion. In fact, I was a little surprise that 15-18 months ago, many blue-chips counters at their lows against the declared dividends in the previous year. For example, DBS was trading between $13 and $15 per share, resulting in a dividend yield of more than 4% based on the declared dividend of $0.60 per share in the previous year. By the same token, OCBC was trading between $8 and $8.50 per share when the declared dividends in the previous few years had been $0.36 per share. The dividend yield would have been more than 4.2%. The gap between the blue-chips had been too close, and it would be either that blue-chip trading price to increase or REITs price to fall going forward. Today, the share price of DBS and OCBC is around $19 and $9.60, and still offering a relatively good yield of 3.15% and 3.75% respectively.

 

For both capital appreciation and dividends, I never forget about how this stock darling – Cerebos Pacific. It is a company that sells the Brands of Chicken. The stock is relatively illiquid with the main shareholder being the parent company Suntory Ltd. The free float was only 15%. (Note: it is important to note that holding illiquid stock is not necessary a good thing. If we wish to hold illiquid stock, our mindset should be to hold as long as it needs.) My purchase price averaged around $2.50 per share by 2003 after consolidation. The dividends had been 9 cents standard dividend and 16 cents special dividend. That went on for a total of 9 years from 2003 to 2012, providing a yield of 10% over an uninterrupted period of 9 years. The special dividend was given every year so much so that shareholders think that the 16 cents special dividend was considered to be a new normal. Needless to say, by the 6-7 years down the road, existing shareholders were collecting dividends and laughing all the way to the bank. At the same time, the share price has been creeping upwards. All these happened in the midst of the global financial crisis in 2008/2009 and also when the company was setting up a new plant in Thailand also around that time. By the time, Suntory took the company private, it had already paid out 9 nominal and 9 special dividends over the 9 years. That would have enough to cover 90% of the initial investment. The buyout price in 2012 was $6.60 per share, offering yet another 6-digit return with little money down. It was like a 10-year bond paying a coupon of 10% and paying the 260% of the capital invested. David Clark in the book “Warren Buffet and the interpretation of financial statements” would have called this equity-bond. It is a form of equity, but it works like a bond from investors’ perspective.

Happy investing!   

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.