Why do people invest in high yield dividend stocks in Singapore?
They do it for a simple reason: To create massive amounts of passive income.
Investing in high yield dividend stocks is useful regardless of whether you’re a millenial investing for the long term or a retiree seeking to develop a stable income stream. High yield dividend stocks provide you with an additional source of income that supplements your other streams of income. Ultimately, if you get to the point where your passive income can cover your expenses, then you’re financially free!
Of course, earning a substantial amount from dividends is not that easy. Typically, you would have to invest quite a big sum of money to obtain high amounts of dividends. Nonetheless, it is still useful to learn about high yield dividend stocks for additional passive income.
But you shouldn’t just buy any dividend stock. In this article, we discuss the 7 key tips when investing in high yield dividend stocks. You will learn about how to choose a good high dividend stock and how to maximise your dividends to make the most money.
1. Dividend Payout Ratio
The dividend payout ratio is an important factor when investing in high yield dividend stocks. This ratio shows you the percentage of a company’s profits that will be paid to the shareholder as dividends.
You can use the following formula to calculate this:
Dividend payout ratio = Dividend per share / Earnings per share
A point of caveat.
You can’t actually determine how high the actual dividend amount or yield is from the dividend payout ratio. If the profits of a company are very low, then having a high dividend payout ratio may not be very useful. This is because receiving a large percentage of the company’s tiny profits would still render the dividends tiny.
Nonetheless, knowing a company’s dividend payout ratio is still useful. Depending on your investment strategy, you can choose to invest in a company with a high or low payout ratio.
Is a High Dividend Payout Ratio good?
If you want to get a big share of the company’s earnings, then you can consider investing in companies with a high dividend payout ratio. A payout ratio of 55% and above is considered high.
However, there are disadvantages to this.
Firstly, having a high dividend payout ratio means that the firm keeps fewer profits for reinvestment. This, in turn, means that the growth potential of the company would be reduced. Therefore, if you want to invest in companies which can possibly increase their profits and share price significantly in the future, you should avoid stocks with high dividend payout ratios. Instead, choose stocks that have low dividend payout ratios of below 35%.
Furthermore, a high dividend payout ratio is usually unsustainable. In fact, you may only be able to enjoy the high dividend payout ratio for a short while. The company will likely have to tweak this ratio in the future, especially if it is not performing well financially or there is an economic downturn.
Healthy Dividend Payout Ratio
What if you want to pick a dividend stock that distributes some of its profits but also keeps some for investment?
There is a way.
You could invest in dividend stocks with a healthy dividend payout ratio. The ratio would fall somewhere between 35% to 55%. This level of payout represents just the right balance of distribution and reinvestment. While the company may not grow as aggressively as one with a lower dividend payout ratio, you get to enjoy some of the company’s profits while allowing the company room to grow.
All in all, how you make use of the dividend payout ratio depends on your investing style and profile. Investors such as retirees who want their money now may seek out stocks with higher dividend payout ratios. Conversely, younger investors who can wait out the growth of companies can consider stocks with lower payout ratios.
2. Company’s Profits
A company’s profits reflect the health of a company’s dividend stock. Without profits, the company cannot pay you any dividends. On the other hand, a company with rising profits is likely to increase its dividend payout to shareholders.
Therefore, you should assess the company’s profitability before making a decision on the dividend stock. You can do this in several ways. Some good measures of a company’s profits are their level of earnings and their return on equity.
3. Track Record
Another key consideration when finding a high yield dividend stock is the company’s track record. In other words, how much dividends have this company been paying out over the past few years?
In this regard, a company that historically pays out consistent and stable dividends is probably going to continue paying out good dividends in the future. This is because in order for a company to steadily distribute dividends, it must have been able to maintain some level of profits over the years. Only then can it return excess earnings to investors on a consistent basis. Thus, the historical performance of a company can give you a good idea of that company’s future dividends.
Dividend Growth Rate
One effective way of analysing a company’s track record is by looking at the company’s dividend growth rate. This is because high dividend yield stocks usually have a history of gradual increases in dividend pay outs over time.
The year-on-year dividend growth rate
You can calculate the year-on-year dividend growth rate using the below formula:
Dividend growth = Dividend for Year B / Dividend for Year A – 1
Thus, for example, if the stock’s dividend for the 1st year is $1 and the dividend for the 2nd year is $1.10, then the dividend growth rate is $1.10 / $1 – 1 = 10%.
The annualised five-year dividend growth rate
Another good measure to assess dividend growth is to calculate annualised dividend growth over a period of five years. This may allow to more accurately evaluate the growth in dividends over a longer period of time.
To get to this annualised figure for five years, you can simply take the total dividend growth of a company and divide it by five years. For instance, if the dividend for the 1st and 5th year are $1 and $1.50 respectively, then the annualised dividend growth rate would be ($1.50 / $1 – 1) / 5 years = 50% / 5 years = 10%.
After you have obtained your dividend growth rate figures, you can place them alongside other comparable companies in the same industry. Thereafter, you will probably get a better picture of how well the high dividend yield stock is doing in terms of dividend growth.
4. Reinvest Dividends of High Yield Dividend Stocks
Reasons to Reinvest
One way of maximising your dividends is by reinvesting them to buy more shares of that high yield dividend stock. Through reinvestment of such high dividend stocks, you can benefit fully from the law of compounding. As you buy more and more shares of the company using dividends, an interesting thing happens.
Not only will the value of your shares start to grow bigger, the dividends you receive each time will also become significantly higher. And what’s more, the effects of compounding would only increase with time.
A telling illustration from the Straits Times illustrates this perfectly. If you start out with an initial investment of $10,000 with an annual growth rate of 5% and add $500 a month without dividends reinvested, you would become a millionaire in 43 years. However, let’s now assume that all things remain unchanged, except that you reinvested the dividends promptly. In the latter case, you would only take 31 years to acquire $1 million from your investment.
Some companies allow for automatic reinvestment of dividends of high dividend stocks. Under the dividend reinvestment plan (DRIP), your dividends will automatically be channelled towards buying more shares of the company. This means that you can increase your shareholding of the high dividend yield stock without having to pay brokerage commissions.
In this regard, numerous blue chip companies provide the DRIP option, many for free. In fact, some companies would also provide you a discount to the market price each time you purchase their shares under their DRIP program. This is to encourage investors to purchase more of their shares such that the company has sufficient capital from equity.
Some regular share savings plans also allow for automatic reinvesting. In this respect, Phillip Capital offers the Share Builders Plan, which is a regular fixed dollar amount investment plan. Under such a plan, you can invest in a basket of 29 shares that you select over time.
5. Distribution Dates of High Yield Dividend Stocks
Regular distribution payments
So when are dividends paid out?
The actual date of dividend payment differs from company to company. Companies may pay out the dividends on a quarterly basis, semi-annually or annually.
You can find out the dividend payment date on the Singapore SGX website by going to “Company Information”, then “Corporate Action” as indicated by the green box in the screenshot below. After that, you can “Select Company Name” and set the category as “Dividend”. In the present case, we have chosen Singapore Telecommunications Limited (Singtel) as an example.
So what do all the terms in the screenshot boxed in red above mean?
The most important term to note here is Ex-Date or Ex-Dividend Date. This is the date that the stock will trade without the dividend. This means that for you to be eligible for a dividend, you would have to successfully purchase your stock before the Ex-Dividend Date. If you buy the stock any later than that, the person who sold you the stock would instead be entitled to the dividend.
Next, the Record Date (also known as Books Closure Date) is the date on which the company determines which shareholders are entitled to the dividend. For this, the company will take reference from the list of official shareholders on the books of the company.
Finally, the Date Payable or Dividend Payment Date. This is the date when the dividends are actually paid out to investors. In the screenshot above, the amount of dividends is reflected under the “Particulars” column above. In this case, the amount of dividend (in purple) that is paid out by Singtel on 13 August to shareholders is S$0.107 per share.
Occasionally, a company will pay out special dividends. This is a one-time distribution of the company’s earnings to shareholders, usually from exceptional profits during a certain period. This is to share the proceeds or increased earnings with the investors.
In the case of Singtel above, it had actually conducted a distribution of special dividends. In fact, it paid out special dividends of $0.03 per share to shareholders on 10 January 2018. This was due to gains from its divestment of 75.2% of its stake in NetLink Trust.
6. Dividend Yield of the Dividend Stocks
In the local context, you can find dividend yield for each stock on SGX‘s website, under the Stock Facts of each company. However, many fail to realise that this dividend yield is for the entire year.
Therefore, if the dividend yield is stated to be 5%, you should not be expecting a 5% distribution at each distribution. For example, if a company such as Singtel declares a distribution of 6% annually and has a semi-annual dividend payout, then you can expect to receive approximately 3% at each dividend payment date.
7. Types of high yield dividend stocks
Now, you must curious as to whether there are certain types of stocks with the highest dividend yields.
Well, there are.
Real Estate Investment Trusts (REITs) historically have higher dividends, which are paid out of their income from their property rentals. In fact, the dividend yields of REITs can range from 5-7%. One of the contributing factors is the current regulations, which require Singapore REITs must distribute 90% of their annual rental income to unitholders.
Other safe and relatively high yielding dividend stocks are exchange-traded funds or index funds. These funds are structured to match or track the components of a market index such as the STI or the S&P500. They allow you to diversify your portfolio by investing the largest companies in that market index. Additionally, you may possibly get relatively high dividends from such funds. However, you have to be aware of the regulations in various countries. As a Singaporean investing in the US, you will be subject to a withholding tax on dividends of 30%. This may erode any potential dividend gains you may obtain from investing in US dividend stocks.
If you’re new to investing, the concepts above may seem daunting.
However, by taking some time to read through and fully understand the investing tips above, you stand a much better chance at maximising your returns from high yield dividend stocks in Singapore.