Last Saturday, we conducted our first webinar for 2019 where we talked extensively about dividend stocks. Here are the key takeaways:
Dividends make up a huge component of the overall returns
Stock returns are made up of a mixture of capital gains and dividends – and dividends make up a significant component of the overall return depending on the country.
It’s also important to note that is the re-investment of these dividends over long periods of time (as opposed to simply spending it) that gives the highest returns.
Also equally important to note for income investors is that the country you are investing in matters. The US market has a dividend withholding tax of 30% deducted at source when dividends are paid to you so that will impact your after-tax return.
On the plus side, you do not have to pay capital gains tax like local US residents which.
This is a huge plus point considering that the US markets have tended to deliver the highest capital returns… so you can take of it as the lesser of two evils.
Simple rules for constructing a dividend portfolio
I talked about the need to focus on companies that generate free cash flow – a topic I have revisited many times on this blog on my case studies with Singtel, Starhub, Hyflux etc.
You can check out my previous post on Singtel, as well as our free video case study on Hyflux.
Going hand in hand with that is the need for a strong balance sheet, or what Jamie Dimon of JP Morgan refers to as a “fortress balance sheet“.
I also talked about how traditional debt metrics may not best capture how strong a company’s balance sheet is and how my preference is always sticky, recurring revenue.
If these terms are unfamiliar to you, you can check out my upcoming Financial Analysis Made Easy Workshop.
Secondly, I talked about the need to avoid companies that are in structural decline. Looking at a company’s operating history can be very misleading as past performance is never a guarantee of future performance.
I cited the example of the decline of traditional print media and how we consume information (smartphones, Youtube etc). Equally important is a good alignment of interest with management to ensure your goals are similar.
On the flip slide, you want to avoid companies that are unable to generate free cash flow over the long run, have weak balance sheets, are in structural decline and have more alignment of interest with you.
The worst thing you can focus on… is the dividend yield
I shared that looking at a company’s dividend yield is by far the biggest trap that investors can make.
I shared my own personal experience of a company called GameStop where I was attracted initially by its high dividend, and my mistaken belief in its operating strength.
Figuring on whether something is worth buying is far more important than figuring out the price to pay.
The subject of the perils of dividend yield is so important that I even dedicated an entire post to it earlier in 2018. You can check it out here:
Finally, I shared that what I thought a sustainable dividend yield of companies (excluding REITS) is in the region of 2.5% to 3.5%.
It doesn’t mean that companies outside that range are unable to sustain their dividend payments – just that I would be more cautious and look deeper at the underlying numbers and business to verify what is happening.
PS: We are conducting our first workshop for the year soon:
Financial Analysis Made Easy:
Step by Step Guide to Financial Ratios
Date: 2nd May 2019, Thursday
Time: 7:00pm to 9:00pm
Venue: Suntec Singapore Convention & Exhibition Centre
We are also throwing in complimentary access to our online course and a bonus webinar on analysing banks in Singapore like UOB, OCBC and DBS.
All our early bird tickets have already sold out.
Sign up now to secure your seat!