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Yield Stocks – AmFraser

DIVIDEND YIELD

We think investing in high yield stocks is a way to protect and grow wealth, particularly in an inflationary yet uncertain environment. When the market dips or corrects, yields rise on lower prices, which is an opportune time to invest. Should the market remain flat thereafter, investors have dividend returns to fall back on even when there is no capital appreciation.

We shortlisted stocks based on three criteria: 1) more than 7% dividend yield, 2) more than $150mil market capitalization and 3) trading volume in the past 30days of more than 100k shares. Macquarie International Infrastructure Fund ($0.570, BUY), on which we have a buy rating, topped the list with 9.6% yield.

Accordingly, we examined each stock to determine 1) the consistency of the dividend payouts in the past three years; and 2) its ability to maintain earnings. Out of 15 high yield stocks, Second Chance Properties ($0.365, UNRATED), Sim Lian Group ($0.605 , UNRATED) and QAF ($0.670, UNRATED) have the strongest combination in terms of consistency in dividend payout and earnings growth.

Second Chance Properties is trading at 8.8% dividend yield and 5.6x T12M P/E. It has a reasonable gearing of 0.37x, with bulk of its assets in retail properties in Singapore. It has a growing DPS of 15.0% CAGR over FY0711, backed by strong and stable cash flow from operations where they achieved S$9.0S$12.0mil every year in the past five financial years.

Sim Lian Group is trading at 7.9% yield, 2.6x FY11P/E and 0.9x P/B. Balance sheet has strengthened over the years, with net gearing ratio dropping from 3.3x in FY08 to 1.1x in FY11. The company recorded 110% YoY jump in earnings in 1HFY12 to $139m.

QAF is trading at 7.5% dividend yield, 5.8x T12M P/E and 0.9x P/B. Their growth in DPS over the past 5 FYs has been exponential, with CAGR of 19%. With a strong current ratio of 1.5x and strong cash flow from opera

Dividend Stocks – BT

Dividend stocks: quality counts too

THERE has been a big buzz around dividend stocks since the last global financial meltdown as investors and funds start to see the importance of establishing a regular income source, especially when the going gets tough.

Moreover, with Singapore's population demographics reflecting a fast ageing population, dividend stocks also serve as an avenue to generate income to fund retirement especially for investors with weaker saving habits. However, are dividend stocks really such a god-send, or have they been over-hyped by financial media?

In general, analysts and investors ascribe a lower risk and volatility profile to dividend stocks due to their ability to generate regular streams of income that help bolster the ill-effects of a potential downturn.

But does this mean that dividend stocks are less likely than their lesser yielding peers to see price upswings due to their less volatile nature?

As a simple illustration, should one compare the basket of 30 Straits Times Index (STI) constituents with a basket of 30 dividend stocks, findings show that though both portfolios generated positive year-on-year price returns, the former reflected a higher annual return of 13.8 per cent as opposed to the 9.6 per cent registered by the dividend stock portfolio.

As such, based on the findings, it seems that dividend stocks tend to experience lower capital appreciation when compared to index stocks.

Having said that, the STI basket is made up of blue-chip quality counters that tend to be highly favoured by both institutions and layman investors alike.

Perhaps, if the comparison was drawn to a basket of lower cap counters, findings might have shown otherwise.

Now coming from a dividend perspective, dividend stocks triumphed over the STI basket with the former having a forecast consensus dividend yield average of 6.2 per cent in FY11 and 6.5 per cent in FY12 as compared to the latter's 3 per cent and 3.3 per cent for the respective financial years.

The findings are not surprising though investors should bear in mind that the STI portfolio has some dividend stocks, which would have given a slight lift to the basket's average yield.

Should the basket exclude dividend stocks entirely, the average dividend yield would have been even lower.

More pertinently, the dividend stock portfolio, unlike the STI one, is able to outstrip domestic inflation rates, which is cited as a key worry for investors today.

As such, investors who are unable to buy commodities like physical gold or property to hedge against inflation could perhaps turn to dividend stocks as their answer to a cost-efficient inflationary hedge.

But there are no fool-proof investments in this world. Just like any equity, dividend stocks are still susceptible to industry recessions and other sector-specific woes.

In fact, during the last recession, many dividend stocks such as real estate investment trusts (Reits) were not spared from the falling knife.

Admittedly, there was sunlight after the rain for investors that had the financial muscle to tide through the rough patch.

But for investors who were retrenched and needed the funds, liquidating dividend stocks such as Reits – and other non-dividend stocks – back then would have severely decimated their wealth.

All that said, it is an undeniable fact that all boats sink when the tide falls. But one of the better known ways to break the fall is to diversify.

After all, putting all your eggs in one basket is never a wise move, especially from a capital protection standpoint. And this holds true even for stocks with a more conservative risk profile, such as dividend stocks.

The key point to drive home is that whether one is planning for his retirement or is merely seeking extra side income, quality is still of paramount importance.

A high yielding stock does not always mean it is a good stock. Though a stock with sound fundamentals and with attractive yields to boot would be a wise investment option.

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.

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.

Yield Stocks – BT

High-yield, low-payout stocks stand out

Strategy tends to outperform others in most rising markets

INVESTING in stocks that offer high dividend yields but pay out only a small proportion of their earnings tends to outperform other strategies in the long term, according to Credit Suisse analysts.

‘High-yield, low-payout essentially means you are buying yield stocks that are trading at a low price-earnings ratio’, or value stocks, its analysts said in a report on Asia-Pacific equities last week.

Such an investment strategy tends to outperform others in rising markets except in the bubble phase, they said. Also, ‘a low payout implies that these companies are retaining cash for growth which also helps long-term performance’.

They analysed stocks in Asia-Pacific markets for the best-performing strategies during the period January 2009 to June 2010.

In Australia, China, India, Indonesia, Japan, Malaysia, South Korea and Taiwan, buying high-yield, low-payout stocks would have earned investors the highest returns over that period compared with other strategies, they found.

The other strategies tested included buying stocks that paid no dividends; stocks that had high dividend yields; stocks with both high dividend yields and high payout ratios; stocks with low dividend yields and low payout ratios; and stocks that had low dividend yields but high payout ratios.

The performances of the various strategies were also compared with that of buying an overall portfolio of stocks for each market.

‘For most markets, the high-yield low-payout strategy was the best performing strategy followed by the non-dividend paying stocks for a few markets,’ the analysts said.

Stocks that pay no dividends are also called growth stocks. Instead of seeking dividends, buyers bet that the share price will increase substantially so they get large capital gain when they sell the stocks.

In Singapore, stocks that paid no dividends showed the biggest returns over the period examined. But investing in high-yield, low-payout stocks was still the best-performing strategy over a longer period of 15 years examined in an earlier study, the Credit Suisse analysts said.

Among those they consider to be high-yield, low-payout Singapore stocks are telco M1, rig builders Keppel Corp and Sembcorp Marine, transport group ComfortDelGro Corp, real estate developer Allgreen Properties and conglomerate Sembcorp Industries.

These stocks have dividend yields of up to 6.3 per cent a year at current prices but pay out as little as one-third of their profits as dividends. All are rated ‘outperform’ by Credit Suisse.

Other stocks, such as Fortune Real Estate Investment Trust and property firms MCL Land and United Engineers, have dividend yields of over 3 per cent a year but pay out less than a quarter of their earnings as dividends.