Tag Archives: Noble

Portfolio building: Should we start with dividend or growth stocks

Abstract – In a dialogue with a student, he asked me whether he should start off with growth stocks or dividend stocks if he plans to build a portfolio. This, obviously was not a do-or-die situation, because building a portfolio does not require an instantaneous action or have to be right first time. But still, it actually set me a bit of thinking because that starting point was a long time ago for me. I was trying to picture myself what I would probably do in that situation. Presumably he was young working adult, perhaps with some decent savings. Obviously, he did not divulge how much he had as he meant it to be a passing question.  

Dividend stocks are stocks that pay good dividends. Usually the companies behind these stocks have grown to a level that the growth potential is unlikely to be significant (at least in the near future). Given that the company still has good earning power, they are able to distribute out their earnings in the form of high dividends. Of course, we are talking about companies that are able to distribute sustainably good dividends and not those that distribute dividends from debts. Apart from REITs, some high dividend stocks can have their dividend pay-out as high as 90%. Constant dividends usually help create a floor price for stock unless the market detects a fall in future dividends.

Growth stocks, by their stage of development, distribute little or even no dividend. Investors are usually rewarded through significant growth in the share price (if we purchased the correct stocks). However, we can expect more volatility in their stock price because there is little or no fall-backs on dividends as we go forward in time. The obvious risk of buying growth stocks is when the company share price plunge for whatever reason and shareholders get close to nothing when they sell their shares.

By nature, companies usually start off as a growth stock paying little or no dividends before they finally become mature and start to pay good dividends. So, if we were to buy into such a right stock early enough, we are effectively riding on the path of growing dividend and finally enjoy the big, fat dividend as the company matures. Of course, during its development, investors stand a high risk that the company could not take off, got derailed or becomes debt-laden(*). In such a case, it is likely to end up in a big hit on the share price and, of course, the loss of dividend. In making such decision whether to buy into a growth stock, one really needs to assess the affordability as well as the WILLINGNESS TO LOSE. It is a question of risk tolerance based on our own experience and background. No one else knows better of our own financials and investing character other than ourselves. The only thing that is obvious to me is that this young man is in a life-stage when he has a higher risk tolerance compare to another person supporting a family with mouths to feed. To me, buying the right stock in growth companies actually helps grow our wealth. Imagine if we buy a stock at $5 per share and it grows to $10 per share, it would have grown our wealth by 2 times, apart from the growing dividends along the way.  This is obviously the objective of getting into any investments (not necessary buying into stocks). But, of course, getting into such investments comes with huge risks which we have to be always mindful of. Perhaps, the saving grace in maintaining a growth stock portfolio is that, at any one time, each stock is at a different growth stage and the good and bad ones tend to offset or cancel out each other.

Now on the dividend stocks. It is likely that when a company pays good dividend, it has already passed its growth stage and that is why it is able to pay us good dividends. They are generally proven companies. So, buying a dividend stock is like buying an annuity, as if we pay an insurance company a sum of money and we get back the payments in the form of dividends. There is some kind of protection from an investor’s point of view. On the share price, it is relatively difficult for dividend stocks to advance significantly because a huge percentage of the profit is paid out to the shareholders. In effect, shareholders do not really get to enjoy share price appreciation but just good dividends. Still, this type of investment is good in a falling interest rate environment because risk-averse investors would look for alternative investments to park their money. Obviously, under such a circumstance, there would be price appreciation not due to the company growth but due to liquidity in the system. The situation would certainly reverse itself when we get into upside slope of the interest rate curve. We are likely to see the share price drop because the same group of investors would start to shift their money back to the bank, base on their risk-reward philosophy. Nevertheless, this type of investment appeals to people who do not have an active income and they need to see their returns almost immediately, in particular, the retirees.

Back on the young gentleman’s dilemma. While it is always good to see rewards coming back to our pockets almost immediately after we invested, the uprising interest rate environment would certainly see the value of the portfolio shrinking going forward if we have too many of these high-yield stocks. Perhaps, he can take on a more aggressive path of growth than income at this stage. After all, he has an active income to fall back on. It is unlike another person who has no active income. If he really needs a protection, then perhaps he can separately purchase an annuity. On the other hand, the capital appreciation for growth stocks can be very rewarding. Imagine the above-mentioned growth stock has a dividend yield of just 2% at $5 and it continued with the same yield, would mean that the dividend is 20 cents when the share price is at $10. At the purchase price at $5 with a dividend of 20 cents would mean that the dividend yield is 4%. In time to come, this dividend yield can be even higher than the dividend yield from a dividend paying stock. In effect, it is a capital appreciation, a growing dividend and a low capital outlay. Certainly, it is even more rewarding if we invest the dividends because it is a growth stock. This is exactly how wealth is made. Wealth is not made by buying an annuity. An annuity is just a protection. But that said, we have to constantly aware of the risk that we are in, especially when we hold growth stocks. A lot of growth companies fall from grace, not because they are in the wrong product, but because of pure mismanagement. Never wear a hat that is too big for our head. Certainly for his case, I am not saying that he has to be 100% on growth stock. I am just saying that he can afford to be slightly more aggressive at this life-stage. Taking on some risks at this stage can be very rewarding for the future. But, whether he is willing to take that risk is another question.

(*) At the time of post, at least three SGX stocks were in such a situation, namely, Noble, Midas and Hyflux.

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the securities, the indices or any ETFs or unit trusts if they are mentioned.

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

The need for mindset change in investing (2)

In any stock seminar, we often hear of the same question over and over again. What are the stocks to buy and what to sell? In fact, it is probably the only question in the mind of investors when they attend stock seminars and investment talks. We all like to hear out what is the next popular stocks in town, and hopefully to make some financial gains out of it.

Of course, we all know that good stocks generally move upwards over time in line with their earnings. But within a very short period time in terms of days, weeks or even months, share prices move in random walk fashion. So, there could be some ‘bad luck’ times when no matter how well we did our due diligence, there could be one or two stocks that fall underwater. Buying stocks is a calculated risk. And often, we cannot wait for all the uncertainties pertaining a particular stock to go away to buy it. By the time, when we are certain that the most of the uncertainties have been removed or considerably reduced, the share price would have already moved up significantly. How fast a stock price moves to reflect the fresh information depends on how efficient the stock market is. Then, there are also times, in the spur of the moment, we bought the wrong stocks or even the right stocks at a wrong price. There are also situations whereby government or the relevant authorities suddenly made changes in their policies or there could be some shocking news that hit a company and we were caught in such situations. Worst of all, we buy on hearsays, market rumours and friends’ recommendations even though they might not necessary come with bad intentions. So, there is a high chance that at any one time when we open up our stocks portfolio, there may be 1 or 2 or even more stocks that are eye-sores in an otherwise, a ‘perfect’ portfolio. Hopefully, these bad stocks form a very small percentage in the portfolio and they are overwhelmed by the bigger gains in other stocks in the portfolio.

At least for the start of our investing journey, the problem often is not because of the one or two bad stocks in the portfolio because, over time, we will get to know which stocks are good and which are bad. The whole problem is that we try to save the bad stocks in hope to make them good. This type of investing philosophy is likely to have been inherited from our young days. Right from the very early stages of our formation years, we have been conditioned by the school system to focus on subjects that we are weak in. For example, when we get 90% for Mathematics and 60% for our English, we are very often asked to focus more on our English, sometimes even at the expense of our Mathematics, in hope to bring up the grade for our English. Very often, we bring such philosophies into our investments. While some stocks advanced, there are also others that fall. As in investing psychology, we tend to be more concerned about those that fell than those that have gained. Consequently, we keep on put new monies, and worse still, sell off the good stocks and buy into those stocks that are declining in hope to make it a ‘perfect’ portfolio with all stocks in the positive territory.  But very often, things get more complicated. The declining stocks got worse and the rising stocks got better. This is where the disaster starts. Imagine we try to sell off some good stocks to average down the stock price of Noble even until today. The stock just simply sinks and sinks. As we have more and more stocks into the portfolio, it also becomes much harder to average down each time. Even blue-chip counters like SPH and Comfort-Delgro are not likely to see turns-arounds anytime soon. So, for those trying to average them may eventually give up after a few years of trying. In short, the whole portfolio ends up with a lot of stocks in negative territory and only a small quantity of good stocks on the positive side. As such, the whole stock portfolio underperformed badly.

In essence, sometimes, we have to accept some imperfection in our stock portfolio. Many investors who have been in the market for some time would probably agree with me that if we simply focus on those stocks that have gained and let go of those stocks that have incurred losses, they could have been very much better off than trying to average down the under-performing stocks. There is imperfection, but this is really the play-to-win strategy when dealing with stocks. It is just like playing a game of chess. We never hear of anyone, even world class players, winning a game of chess without losing a single chess piece. In fact, very often, they are willing to trade off high-value pieces to win the game. Even a king with just a pawn may win in the whole chess game. Very often, many investors out there try to save all the counters to bring them into the positive territory by simply averaging down but, eventually, find themselves struggling to outperform. This is because there are too many drags on the portfolio. Then, there are others who do not invest because they cannot accept even some loss counters. On the whole, it is a bigger loss because good stocks do gain in the long run. In summary, it is generally acceptable to have a few minor losses just like not every business endeavour turn into a success story. It is alright to be imperfect. We play-to-win and not to play not-to-lose in stock investing. That should be the mindset.

Note – A video clip on this investing psychology is available free in bpwlc.usefedora.com.  The video clips are part of the more than 60 video clips on the online course in InvestingNote.com, namely: Value Investing – The Essential Guide and Value Investing – The Ultimate Guide.

Disclaimer – The above arguments are the personal opinions of the writer. It is not a recommendation to buy or sell the mentioned securities, the indices or any ETFs or unit trusts related to the mentioned indices. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.