Dividends – BT

Dividends finally get their due respect

DIVIDENDS were once regarded with disdain in this part of the world. Investors bought stocks for capital gains, accepting higher risk as part of the bargain. Dividends were seen as boring, so companies pandered to this and put all their focus on growth.

Attitudes, however, have changed over the past few years and, if anything, the recent earnings season – while highlighting higher profitability – has also put the spotlight on the dividend policies of Singapore-listed companies.

One survey of just under 100 companies that reported FY2010 results last month, for instance, found that over 40 will be paying out more dividends than a year earlier while just over 20 will be paying out less in dividends. The remaining firms will be keeping their dividends constant.

Overall, the dividend yield of the Singapore market this year is seen at around 3 per cent, with banks and telcos seen as strong dividend payers.

Of course, this can be put down to the boost enjoyed by listed firms as the Singapore economy rebounded last year, while healthier cash positions enabled debt levels to be pared down. Still, it should not detract from the shift in underlying attitudes.

In the past, companies would have ploughed all the spare cash into expansion. There appears now to be a bigger commitment to returning cash to shareholders.

And in the backdrop, the establishment of a large Reit (real estate investment trust) and business trust sector – in which entities pay out all or most of their income to unit holders on a recurring basis – also contributed to the payout culture.

Widespread in region

Singapore companies are not alone in the region in embracing the dividend culture. Indeed, they would have been left behind if they had not done so. Australia and Hong Kong are both seen as markets with a sizeable cluster of dividend-paying stocks. Even in developing markets like China and India, and smaller ones like Thailand and Indonesia, dividend payout ratios have been rising.

Last year, in fact, several global fund managers set up emerging market dividend funds to tap the growth of the dividend culture, with Asia a prime focus. This dividend-focused approach targets companies with sustainable and growing dividends while providing downside protection in the event of market setbacks.

This would have seemed unusual just a decade ago, but no longer. Recent studies have noted that capital returns have rarely been a dominant component of total return nor have they a strong relation to economic performance. One particular study into the historical make-up of total return for Asia from 1994 to 2008 showed that dividend return was the largest component of total return, and has a much stronger correlation to economic growth.

The growth of the dividend culture in Singapore and the region is a welcome development. Dividends are not just about putting cash in the pockets of shareholders. A dividend culture also has the potential to shape investor behaviour.

To put it simply, dividends encourage investors to buy and hold, which is a shift from the trading mentality of many retail players. Indeed, one reason put forward for the lacklustre IPO market so far this year is that many investors now would rather seek the safety of dividend-paying stocks than take a punt on new listings.

Good corporate governance

And there’s a corporate governance angle too that’s not always highlighted.

As some have argued, investing in companies paying high dividends goes beyond shareholder returns. Companies that have high payout ratios also tend to be companies with good corporate governance standards. This is because the distribution of excess cash as dividends helps to limit the potential for mismanagement – or, worse, exploitation by insiders.

It also prevents situations where excessive cash leads to wasteful or unproductive investments; in the 1990s many companies were focused on expansion with little regard for capital discipline, and many destroyed shareholder value.

A strong dividend policy, as a corollary to short-term share price gains, helps align the interests of managers and shareholders for the longer term, and signals a company’s commitment to look after shareholders’ interests.

Much has been said about the limitations of the Singapore market: the lack of depth, poor liquidity, and weak companies. But the development of a dividend culture surely ranks among the positives.

Indeed, if investors here had used dividends as a stock selection screening tool, they probably would have sidestepped some of the troubled stocks that have surfaced over the last few years.

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