Thoughts on Dividend Investing

Just like to share some thoughts on my view on dividend investing on this post. 

Before getting into this, lets state the obvious, dividend investing strategy can be an effective strategy if it aligns with your overall financial objective. This is one of the reason why you should know the reason you choose a certain strategy, not because everyone else is doing it, but because it aligns with your life goals and one that make sense to you. Coming back to dividend investing, this strategy has proven to work and it is particularly suitable for anyone who rely on dividend as a source of income to sustain their lifestyle, which is the case for most retirees and full-time investors as well. And my thoughts are, unless you really have a solid reason as to why you need a regular, sustainable cash inflow, you shouldn't focus too much on how much a stock is paying dividend as the main criteria for your investing decision. 

The role of all investors are more or less the same, that is to generate the highest possible return in a long long time. The only way to achieve that is to allocate your capital wisely. Warren Buffett is a shrewd capital allocator. If you have read his annual letters or any book about him, you'll know that when he took over Berkshire Hathaway at the time when it is nothing more than a textile mill company, he started to downsize the business and redirect those cashflow into insurance business, See's Candies, and other more productive businesses. What do they all have in common? They all generate a very high return of capital compare to the textile mill business. That is how he snowball his wealth by compound it at the highest possible rate for 40-50 years. 

Similarly, your role is not that different. For every dollar in your hand, you want to allocate it into an investment that can generate the highest possible return. So here's the issue with dividend investing. Dividend investing is akin to cutting the snowball in half every time it started to roll bigger; or imagine trying to trim the tree and saw off its branches before it has the chance to grow into a mighty tree, there's no chance for your capital to compound and get really big. Now, of course you can always reinvest the dividend. But there's a few risks. How long does it take before you can find a similar attractive opportunity before you can deploy those dividend? The time require to study the investment? And not to mention, there is a very high chance you're definitely going to spend a portion of your dividend rather than reinvest 100% of it back into the market. These are the things that rarely get discussed when someone touting the benefit of dividend investing. Your focus should always be on the return of the business regardless of whether the level of dividend the stock is paying. If you have a stock that generate 20% ROC for a long time, pays zero dividend; while another has the same ROC, pays 90% of its earnings as dividend, the first will always going to make you way more money in 10 years time than the latter. But if your eyes is solely on dividend, you're going to pick the latter and miss out the former. 

Dividend is great if it serve the purpose of meeting your financial objective. But if you pure objective is to set aside your capital which you don't need for the next 30-40 years, it is always better to search for stocks that has a very high return on capital, and preferably, pay as little dividend as possible. Of course, that kind of business is rare. But the gist of this writing is dividend investing can be exotic, watching multiple streams of income flowing in every quarter, but that might actually be 'hurting' your ability to compound your long term wealth. 

Thanks.

Nice sharing!
I prefer dividend paying companies. My reasons, as learnt in the past few years of my relatively short investing journey:
- A long history of dividend payment could be an indication of a legitimate profitable business. (As long as the company is not funding the dividends out of borrowing/equity issuance. Or by neglecting maintenance capex)
- Amount of dividend paid out can be a measure of majority shareholder/management's willingness to share profits with OPMI

It is just one indicator that may suggest a healthy company before digging deeper for the details.

Companies of course can have legitimate reasons for keeping cash for expansion, but it is up to the OPMI to determine if the reason is legitimate or not. Some question to ask ourselves about companies not paying or paying minimal dividend.
- Is the cash real?
- Is management keeping the cash to pay themselves unreasonably large and increasing salaries? Give cushy jobs to friends/relatives? Providing nice terms in related parties transactions?
- Is management expanding the business for the benefits for all shareholders, or is the purpose to inflate ego or salaries (if pegged to revenue/AUM/etc)?
In other words, how much do you trust management to look after your interest in your share of the retained earnings not paid out?

Making investment decisions based on dividend yield is the same as making investment decisions based on price to book ratio, price to earning ratio, or return on equity. They all center around one main criteria. Sometimes taking such a narrow approach works, and sometimes it doesn't. Tat Hong had a low p/b before it was bought out. Tiong Woon has an even lower p/b but nothing has happened for a very long time. Currently, Indofood Agri has a very very low p/b, but will it be a good buy? I'm sure everyone has their own examples of how they made money by just looking at a single criteria, such a low p/b. But can this method be profitable all the time?

It becomes a problem because when practitioners of such a parochial approach actually believe that this can consistently make them money, it causes them to overlook the other risks and/or issues in their research. I know of some people who bought Swiber/Hyflux debt instruments. These same people have had positive experience with similar high yielding debt instruments bought during an earlier period. When I quizzed them on their knowledge of the issuing company's financial position, the only number they know seemed to be the coupon yield. If you're lucky, the lesson is learnt early in your investing career, and probably, capital lost is small.

Basing an investment solely on dividend yield has its pitfalls too, as already mentioned by thread starter. But as also already mentioned by gzkbel, companies that pay dividend are likelier to perform better. The bottom line is an investor needs to look at everything, to be able to make profitable investments consistently. If you look at dividend yield without looking at debt, you may have bought some of the shipping trusts. If you look at dividend yield without studying the industry and business environment, you may have bought some of the telcos and maybe even sph. If you look at dividend yield without looking at management, you may have bought some Sabana Reit. If you look at dividend yield without looking at cashflow, you may have bought some s-chips.

Terms like value investing, growth investing, and income investing reflect such parochial thinking. Investors serious about making money should not confine themselves -- and therefore their skills -- to a particular term. There is no 'one trick' to making consistent profits.

(04-07-2018, 06:51 PM)karlmarx Wrote: Making investment decisions based on dividend yield is the same as making investment decisions based on price to book ratio, price to earning ratio, or return on equity. They all center around one main criteria. Sometimes taking such a narrow approach works, and sometimes it doesn't. Tat Hong had a low p/b before it was bought out. Tiong Woon has an even lower p/b but nothing has happened for a very long time. Currently, Indofood Agri has a very very low p/b, but will it be a good buy? I'm sure everyone has their own examples of how they made money by just looking at a single criteria, such a low p/b. But can this method be profitable all the time?

It becomes a problem because when practitioners of such a parochial approach actually believe that this can consistently make them money, it causes them to overlook the other risks and/or issues in their research. I know of some people who bought Swiber/Hyflux debt instruments. These same people have had positive experience with similar high yielding debt instruments bought during an earlier period. When I quizzed them on their knowledge of the issuing company's financial position, the only number they know seemed to be the coupon yield. If you're lucky, the lesson is learnt early in your investing career, and probably, capital lost is small.

Basing an investment solely on dividend yield has its pitfalls too, as already mentioned by thread starter. But as also already mentioned by gzkbel, companies that pay dividend are likelier to perform better. The bottom line is an investor needs to look at everything, to be able to make profitable investments consistently. If you look at dividend yield without looking at debt, you may have bought some of the shipping trusts. If you look at dividend yield without studying the industry and business environment, you may have bought some of the telcos and maybe even sph. If you look at dividend yield without looking at management, you may have bought some Sabana Reit. If you look at dividend yield without looking at cashflow, you may have bought some s-chips.

Terms like value investing, growth investing, and income investing reflect such parochial thinking. Investors serious about making money should not confine themselves -- and therefore their skills -- to a particular term. There is no 'one trick' to making consistent profits.

Actually there is a simple trick, it's called indexing....

I don't go for the highest returns. I go for the tried & tested investment method - be a landlord. Our forefathers and ancestors have achieved considerable success with this strategy. Why re-invent the wheel if it in't broken? 
The strategy is to own tangible assets that generate regular, sustainable and rising cashflow over the long-term. These tangible assets would be expected to appreciate in value too. A few selected REITs have achieved this 2-prong growth in NAV & DPU.

Example: FCT has a solid 11-year track record

I don't think anyone is reinventing the wheel here. The strategy of "own tangible assets that generate regular, sustainable and rising cashflow over the long-term" is an emphasis on return on capital again, not dividend. Dividend is just a byproduct of management decision on how to allocate their capital. If one buys FCT at a fair price and hold 30-40 years, his return will be similar to the return of the actual business.

To look at FCT return, we just have to look at the growth of equity and debt over the past 10 years: (Sep 07 - Sep 17)
Equity: 671 mil to 1872 mil
LT Debt: 258 mil to 645 mil
ST Debt: 3 mil to 152 mil

That's a total of 1737 mil capital injected into the business over the past 10 year. At the meantime, earnings has grown by 110 mil, from 79 mil to 193 mil. So the return of the business is around 6.3% (110/1737)

If you look at the share price, it went from $1.37 to $2.2, add in the $0.98 dividend distributed in the last 10 years, you get a CAGR of 8.78%, which is still pretty good.

Like I said, over the long term, the market return is going to trend very close to the business return. If the return align with your financial objective, that's all great, stock market is not about comparing ego, but get to where you want to be.

A landlord of a well-located property will feel rather secure collecting monthly rental, since demand for good space is lower than supply. However, fortunes of the past were made not by collecting rent, but by trading properties. Growing economies facilitated growing land values, and hence, profit from trading. Now that growth has slowed considerably in Singapore, rents are forming a bigger proportion of a property investor's returns, as profits from trading are thinned.

The issue with collecting rent as a landlord is that the ROA is very low. If I were to finance a property purchase completely with cash, my rental return is perhaps not too far from what CPF can offer. Based on that alone, it does not make property investment attractive. This is the problem with easy-to-understand 'good' investments; everybody can see its attractiveness, and therefore, resulting in higher bid prices and lower yields. The easiest sure-win investment is fixed deposits, or structured deposits. But do those products offer the returns that you are looking for?

Financing a property investment with a loan is what juices up its returns. Most people don't like to discuss about the risks associated with a loan, but it is there nonetheless. Personally, I prefer the comfort of not having to worry about margin calls and higher financing costs. Depending on your exposure, if you're not financially/mentally prepared for such scenarios, you may be exposing yourself to being wiped out.

As for indexing, the returns will depend on the strategy employed by the investor. Trade? Buy and hold? DCA? If it is a buy and hold strategy, the investor will not have done very well if the purchase was done anytime after 2010. Assuming an investor bought in 2010 at STI 3,000, there will be regular dividends of 2-3% a year. But how much capital gains? It depends on when you sell. If it was at the peak of 3,600, then it is 20% over 8 years. If it is sold today, then it is 6% over 8 years. Singapore used to grow at 8% p.a., which allowed STI to also grow by that much. If Singapore grows at 2-3% over the next 10 years, and STI mirrors that level of growth, is that something index investors can accept? Some yes, some no.

Since Singapore growth and index are generating such low returns, investors may be seeking alternatives such as US, EM, China, or Asia. The investor will not only be exposed to forex, but also the question of whether the country they choose to invest in, will prosper. To assuage their concerns and improve their chances of success, some research or due diligence will be done to form the basis of the investment decision. So there is still some work involved.

My personal conclusion is that an investor's returns are proportional to their effort in conducting DD.

Younger investors with good jobs are usually able to live on their salary and will be looking for capital gains and not looking for income stocks.

Older investors with children's university fees to cover may look to invest in income stocks.

Retired investors and not receiving salaryfrom working, will look for dividend stocks to fund their daily living expenses.

Dividends are not the be all end all in investing. In fact, having to pay a dividend is a disadvantage if you are a young growth company with lots of runway.

In addition, if you invest in overseas stocks like the US, dividends are taxed, and capital gains are not. 

Also, dividends serve almost no socioeconomic function besides enriching shareholders; the society at large will probably be better off if the company/investors are able to reinvest the income generated back into the economy to improve overall productivity and quality of life.

Karlmarx hit the nail on the head here on the topics of dividends, real estate and investing in general, IMO.

(06-07-2018, 05:46 AM)RJT Wrote: I don't think anyone is reinventing the wheel here. The strategy of "own tangible assets that generate regular, sustainable and rising cashflow over the long-term" is an emphasis on return on capital again, not dividend. Dividend is just a byproduct of management decision on how to allocate their capital. If one buys FCT at a fair price and hold 30-40 years, his return will be similar to the return of the actual business.

To look at FCT return, we just have to look at the growth of equity and debt over the past 10 years:  (Sep 07 - Sep 17)
Equity: 671 mil to 1872 mil
LT Debt: 258 mil to 645 mil
ST Debt: 3 mil to 152 mil

That's a total of 1737 mil capital injected into the business over the past 10 year. At the meantime, earnings has grown by 110 mil, from 79 mil to 193 mil. So the return of the business is around 6.3% (110/1737)

If you look at the share price, it went from $1.37 to $2.2, add in the $0.98 dividend distributed in the last 10 years, you get a CAGR of 8.78%, which is still pretty good.

Like I said, over the long term, the market return is going to trend very close to the business return. If the return align with your financial objective, that's all great, stock market is not about comparing ego, but get to where you want to be.

To just add in the dividend paid out over the years to the price gain is too simplistic a way 
The real returns are actually more
As each yr, more shares are added. And to that more dividends are obtained
Einstein 8th wonder has deeper meaning to what most think