kcchongnz blog
Investing for dividend kcchongnz
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.
For all this while, I seldom care about dividend in my investment as summarized in my investment strategies in the links below, as I thought dividend does not matter much in our investment outcome, like what was taught in the universities:
http://klse.i3investor.com/blogs/kcchongnz/56884.jsp
http://klse.i3investor.com/blogs/kcchongnz/75946.jsp
http://klse.i3investor.com/blogs/kcchongnz/75962.jsp
http://klse.i3investor.com/blogs/kcchongnz/75985.jsp
http://klse.i3investor.com/blogs/kcchongnz/76066.jsp
Then I look carefully in the returns of all those multi-baggers and high return stocks in my portfolio in Pintaras, Prestariang, Jobstreet, Homeritz, ECSICT, NTPM etc. as shown in my recent post below,
http://klse.i3investor.com/blogs/kcchongnz/84923.jsp
All the high return stocks are in fact are high dividend stocks. In fact almost all the stocks are high dividend stocks, and the portfolio have done extremely well as you can see. Is that just a coincidence?
Dr. Neoh Soon Kean, in his book “Stock Market Investment in Malaysia and Singapore” gave dividend as the only reason that drives the share price as shown in his statements as follow:
“THE VALUE OF A SHARE DEPENDS ON ITS FUTURE DIVIDENDS”
“THE VALUE OF A SHARE DEPENDS ON ITS FUTURE DIVIDENDS”
I would like to add the below to what Dr. Neoh mentioned above.
“THE VALUE OF A SHARE DOES NOT DEPEND ON BONUS ISSUES, SHARE SPLITS, OR FREE WARRANTS.”
“THE VALUE OF A SHARE DOES NOT DEPEND ON BONUS ISSUES, SHARE SPLITS, OR FREE WARRANTS.”
No, there are no mistakes in both the double statements above. Read my lips.
Repeat these sentences if ever you are tempted to join the madness of the crowd.
Also please read this article here regarding bonus, share splits and free warrants, along with those comments on EAH, Bonia, Datasonic, JAG etc.
http://klse.i3investor.com/blogs/kcchongnz/79280.jsp
For the detractors, please do not get annoyed as I am just talking about investing, whether value or growth investing, not trading, speculating or punting.
Share is just a form of investment. Except for special situations, the return that they can provide must bear some relationship to the alternative returns that investors can get, for example fixed deposit rate, return from rental in property investments, etc. The dividend yield (DY) investing in a share must bear some resemblance to the returns from alternative investments.
Dividend yield = dividend / Share price
Apollo Food pays a dividend of 25 sen last year. Its share price closed at RM4.98 on 23rd October 2015. Its dividend yield is 0.25/4.98 = 5.0%. This DY is good as it is above the prevailing bank fixed deposit rate. Bear in mind business generally grows and its dividend will grow in tandem.
What is the use of earnings?
Most stock market players, including institutional investors, fund managers focus too much on earnings, and the use of price-earnings ratio (PE) is the most common method in market valuation. Investment bankers and professional analysts also like to use this earnings to cloud your judgment. Unless earnings are converted to cash in the pocket of shareholders, it remain as a castle in the air.
What is the use of this earnings if it has to be continuously reinvested into new plant and equipment for the business just to keep its door open like that of London Biscuits?
http://klse.i3investor.com/blogs/kcchongnz/70874.jsp
What is the use of these doggy earnings and earnings forecasts?
http://klse.i3investor.com/blogs/kcchongnz/63417.jsp
What is the use of earnings if it is eventually wasted away in empire building by the management?
What is the use of earnings if eventually the loots are squandered away by the additional free shares and warrants to the management and major shareholders and diluting earnings base?
Why is dividend important
“A stock dividend is something tangible-it is not earnings projection; it is something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation.”
Richard Russell
Dividend is a real thing. You get 25 sen per share dividend from investing in Apollo Food last year and this year, better than the interest rate from FD. You pocket it, use it for consumptions, or reinvest in the same or other dividend shares and in return, get more dividends.
During the bear market, Apollo share may go down to RM2.00, but you would not feel too scare as the dividend yield then is 12.5%. In other words, it can provide a “floor” for share price when bear stampedes, and you won’t get too worried and still be able to sleep well:
http://klse.i3investor.com/blogs/kcchongnz/81334.jsp
When the market is too hot, dividend yield keeps us in close touch with the real world. If London Biscuits gives you a dividend of 1 sen in 2014, you wouldn’t want to chase its share when it went up to RM1.00 with news that they would reduce their huge capital expenses finally, for a DY of just 1%, way below the FD rate.
Last but not least, dividend yield prevents you from being side-tracked by events which have little or no real benefits to you as a shareholders, such as bonus issues, share splits, free warrants, property injections by major shareholders, merger and acquisition, high growth, and getting of big contracts which keep on losing money like before etc. like these ones:
http://klse.i3investor.com/blogs/kcchongnz/63777.jsp
Why don’t I talk about capital gain?
But why haven’t I talk about capital gain? Isn’t capital gain also important as it is the second part of the total return equation?
Capital gain is of course important. But what logical reason you can give for the share price to go up?
The share price will go up because of the growth in dividend. Yes, it is because of dividend again.
The management must manage the company well so that the company can pay growing dividends. That is the role of management, not all the time thinking about how to jack u share price.
The dividend of Apollo was 7.4 sen in 2008 when it was trading at about RM2.50. The dividend yield was 3.0%. Its dividends has increased to 25 sen now and at RM4.98, an even more attractive DY of 5% when the share price has risen by 100% in 7 years, or a compounded annual growth rate of 10%.
Apollo has not given any bonus issues, share split or free warrants, the number of shares remains at 80m, but they are able to pay 3.4 times dividends from 7.4 sen seven years ago to 25 sen now, without having to issue a new shares nor borrow a single sen from the bank?
What does the research show?
By the way, empirical academic research is not merely “academic”, or theory. They are vigorous back testing of historical data using econometric models in searching evidence to prove something. They are not merely hearsay or spurious results, but solid and vigorous evidence.
Robert Shiller examined the predictability of annual S&P composite returns in 1986 and found that dividend yields explained a significant 16% of the variation of returns in the 1946-1983 period.
Fama &French (1988) reported that dividend yields explain 25% of the 2 to 4-year returns. In economics, unlike science, 25% is a significant number.
In 1978, Krisna Ramasawamy and Robert Litzenberger established a significant correlation between dividend yield and subsequent stock returns.
More recently, James O’Shaughnessy has shown that in the period 1951 through 1994, the 50 highest-dividend-yielding large capitalized stocks had a return that was 1.7% higher than the market.
Jeremy Siegel, in his book “Stocks for the Long Run”, has further confirmed the out-performance of high dividend stocks from his research using data from 1957 to 2012 with striking results. The highest dividend stocks returned a CAGR of 12.6%, compared to 10.1% of the S&P 500 index.
High dividend yield investing strategy: The KLSE evidence
I have done a little rough “research” on high dividend yield investment strategy myself which was published in the link below:
http://klse.i3investor.com/blogs/kcchongnz/62033.jsp
During the five years period from 11th October 2009, the broad KLCI index has increased from 1267 to 1841 at the close on 10/10/2014. The CAR of the broad market is 7.8%. With an approximate dividend yield of 3%, the total return of the broad market is estimated to be about 10.8% a year.
The average total CAR (capital gain plus dividends) of the 35 highest DY stocks chosen, assuming the stocks were held for 5 years, was 16% with a median of 12.2%. Both are higher than the return of the market of 10.8%. The average excess return was 5.2%. That is not bad at all.
Does buying high dividend stocks always work?
Not really. Table 1 below shows that if you have purchased HBGlobal with a dividend yield of 6.9% on 30/5/2012, you would have lost a whopping 80.4% while the broad market has gone up by about 15% during the same period. AEGB, the former high flier Master Skill Education Group suffered the same fate with 50.4% loss. Even a seemingly good stock, JCY is not spared with a loss of 42.7%.
Table 1: High dividend stocks in 2012
|
Price |
30/5/2012 |
Dividend |
Price 24/10/15 |
DY |
Cap gain |
Total gain |
|
HB Global |
0.55 |
0.038 |
0.07 |
6.90% |
-87.3% |
-80.4% |
|
JCY |
1.5 |
0.15 |
0.77 |
6.00% |
-48. 7% |
-42.7% |
|
AEGB |
1.08 |
0.0558 |
0.48 |
5.20% |
-55.6% |
-50.4% |
The caveats on high dividend stock
High dividend investing strategy can very well be a winning strategy if the company has a stable business with consistent and proven cash earnings power that can grow over time. It may not be good for the company if there is inadequate normalized earnings and free cash flows. It is especially so if there is no excess cash in its balance sheet, and instead with significant debts.
This dividend payment is hence unsustainable as the company has to borrow or issues new shares in order to pay dividend. Paying too much dividend also negatively affect growth as less money is spent on capital expenses for the future growth of the company. A company with low return on reinvested capital is also unlikely to sustain high dividend payment.
When embarking on a high dividend investing strategy, it is better if you carry out the following checks:
- Dividend yields at least two thirds the bank fixed interest rate, currently about 4.0%.
- Dividend payout ratio should be less than a cut-off, say 65-80% so that there is money left and the business can still grow with the reinvestment for potential increase in future dividend.
- A business model that doesn’t require massive amounts of capital outlays relative to its earnings power.
- Reasonable expected growth rate in earnings at least matches the overall economy, say >4%, also for the potential growth in dividends in the future.
- Strong balance sheet for sustainability of dividend payment.
- High return of equity and capitals > 12% such that the dividend payment is not only sustainable, but grows from internally generated funds.
- Shareholder-friendly management dedicated to treating shareholders as owners
Conclusions
Investing in high dividend stocks can be a winning strategy but it is not full proof strategy. It was shown that the total return of some high dividend yields stocks in the past did not provide satisfactory total return compared to the broad market, although on the whole, it provided a positive alpha. However, it is still a viable strategy though if you can separate the chaff from the wheat.
In fact valuation wise using discount dividend model (DDM) is more reliable for me as there is less uncertainties in estimating future cash flows as shown in the link below.
http://klse.i3investor.com/blogs/kcchongnz/83959.jsp
With steady earnings and cash flows, healthy balance sheet, using DDM to value what a stock is worth brings the art of valuation closer to science, and we can be more confident with the margin of safety.
For those who wish to learn about using this investing strategy, or require help to build up a safe and reasonable expected return portfolio for long-term, please contact me at
K C Chong (24th October 2015)
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Discussions
12 people like this. Showing 50 of 102 comments
KC, I like this statement you had shared here
"During the bear market, Apollo share may go down to RM2.00, but you would not feel too scare as the dividend yield then is 12.5%. In other words, it can provide a “floor” for share price when bear stampedes, and you won’t get too worried and still be able to sleep well"
a 'head I win and tail I don't lose much" style of investment
I always follow this principle to invest because I don't like to run and do not know how to escape during the market price crashes
so I play safe, the company I invested in must have (i) yield at least better than bank SA can give you,(ii) foreseeable growth for the coming year 1 or 2 years , (iii) buy in at a reasonable price based on the valuation techniques I had learnt from your article and (iv) wait patiently for your turn to enjoy your harvest.
you must know, every investment needs some luck. God need time to decide who should take the money. it is definitely not those who can't wait.
do not tell me , how smart you are to have made 100%, 200% or 300%,..
just refresh the history of datasonic or prestariang, there are buses of people making that score including me.
conclusion:
SAFE money is always better than FAST money. sometimes SAFE can be fast also
LUCK IS UNPREDICTABLE. Stay safe and sleep well and keep good health to enjoy your winning
2015-10-25 16:52
when big names in Bursa Market talks..
such as DreamPredator and KCChongnz ...
the market pays attention ..
while AyamTua at it, lemme have the honor to peddle my horses to eyeballs .. for next week races..
AAX - airlines.
PUC - photovoltaic, solar etc.
Glotec - CBM Gas Indonesia
Xinghe - Minyak Kachang
Flonic - Maintenance and Engineering
ya la la.. ya la la.. ha ha haaaaaaaa!
Posted by kcchongnz > Oct 25, 2015 03:50 PM | Report Abuse
Posted by DreamPredator > Oct 25, 2015 01:54 PM | Report Abuse
5 years time, KCChongNZ? I invested 200k in a penny stock in October - November 2013. And it wasn't even the Mother stock, but a newly issued Warrants. By mid-August 2014, it was worth 565k. Now why wud I want to bother with a strong-fundamentals 3rd liner, mid-cap or 2nd liner giving roti-canai dividends & then hv to wait for 5 years for it to double. That is, IF it does ever double.
Wonderful. When are you going to write a book to teach us your strategy
2015-10-25 16:56
Wise words from a wise man
Posted by pisanggoreng > Oct 25, 2015 04:52 PM | Report Abuse
'head I win and tail I don't lose much" style of investment
I always follow this principle to invest because I don't like to run and do not know how to escape during the market price crashes
so I play safe, the company I invested in must have (i) yield at least better than bank SA can give you,(ii) foreseeable growth for the coming year 1 or 2 years , (iii) buy in at a reasonable price based on the valuation techniques I had learnt from your article and (iv) wait patiently for your turn to enjoy your harvest.
you must know, every investment needs some luck. God need time to decide who should take the money. it is definitely not those who can't wait.
do not tell me , how smart you are to have made 100%, 200% or 300%,..
just refresh the history of datasonic or prestariang, there are buses of people making that score including me.
conclusion:
SAFE money is always better than FAST money. sometimes SAFE can be fast also
LUCK IS UNPREDICTABLE. Stay safe and sleep well and keep good health to enjoy your winning
2015-10-25 17:17
in a rare public display .
two names, namely DreamPredator and KCChongnz
in one forum .
both command majorities ..
respect.
2015-10-25 17:25
The point that has to be made is that, many dudes make the assumption, quite mistakenly to DP's mind, that business & wealth-building has to be something dead serious, completely devoid of fun. Now that is one big mistake that has to be corrected. Big time.
2015-10-25 17:30
ya la la..
wa ... haaa.. biiiii
ya.. laaaa... laaaa
ha ha ha..
i believed in Arabs 2.6b donations ?!
ha ha ha
have fun people...
all the best nothing but wishes to see you huat..
joy and happiness always.
Make Love not enemies - life is short.
Sincerely,
Dr. Ayam
2015-10-25 17:41
Arabs hv big money lor ... They want to gv, we take la ... Why cannot ah ... Bukan rompak dia leihh ...
Political donation every leader of ruling party in every government in the world can take leihh ...
Listen to Thorny Phua habis lor ... everything wrong, everything cannot ... klu kasi sama dia sikit baru okay lor ... Podaaah la ...
2015-10-25 17:51
Dreampredator, good on you. Now i realise gut instinct, read magazine is the new 'smart'. You blew everyone out of the water bro, not just Superinvestors but Einstein, Socrates, Marcus Aurelius, Newton etc. What a legend
2015-10-25 17:59
JTYeo, keeping plenty of spare space in one's head, to let in, process, analyse & synthesise useful & inspiring info is what is more important ...
Instead of continually cluttering it with unending amounts of useless, irrelevant crrap ...
2015-10-25 18:09
oh wow fck u beat Stephen Hawking too, he havent figure out the theory of everything, u must have beat him to it.
2015-10-25 18:16
I dont know bro, i think you can get more crap in your head on forum and magazine then reading a great book though
2015-10-25 18:17
Some like big boobies,some like airport,some like one night stand,some like 5 yr relationship..as long as happy by himself,what's the problem?
2015-10-25 18:17
Tony Blair apologises for Iraq War
https://uk.news.yahoo.com/tony-blair-apologises-iraq-war-mistakes-230814028.html#sR9KTLR
The war that according to BBC Television killed more than 500,000 Iraqis. The majority of them children, women & the elderly. And the war that some dudes reckon was the ultimate cause for the rise of IS.
Now, as an Englishman would say, 'Well, it's bloddy late, ain't it?'
2015-10-25 18:18
And can you gv us all one example of what to you is a great book then, JT.
2015-10-25 18:20
Meditation by Marcus Aurelius is a start. But dont think ull be interested. Written more than 2000 years ago
2015-10-25 18:24
Ayam tua please write on "How to be old and stil horny."Wakakakaka.
Make love not quarrels.
2015-10-25 18:24
though our body is getting old everyday
the spirit always renewed everyday.
its never about money per se..
its all about having faith in what you buy.
Dr. Ayam
2015-10-25 18:26
JT, I prefer real, imperfect life. Meditation is for dudes who prefer to escape into an unreal, perfect world.
2015-10-25 18:27
Told you you wont be interested. and by the way, the book writes nothing about meditation.
And while we are on the topic of meditation, there are US soldiers fighting in Iraq that uses meditation to deal with the burden of war and the probability of death at anytime, talk about escaping into unreal perfect world.
2015-10-25 18:32
i have great respect for old folks trying something new each day
than succumbed to thoughts that they are dying and hopeless..
remember its all about having the right mindset.
not all things abou money money money..
well money can buy happiness and arab women..
but definately cant buy .... what made you - you.
have faith in what you buy while making money
please help those unfortunates.
positive message - nothing but doa for you all to success in life.
got money but having broken families with divorce also no use.
its all about your own unique experience and journey
not everyone created equals in their journey..
some stumble , some falls but some given all luckiness, faith
and perseverance...
will succeed....
dont. give. up. hope.
2015-10-25 18:33
Dr Ayam,your EQ is perfect although your investing skills are less than perfect.
Salute!
2015-10-25 18:37
dont worry bro - even underdog can be come champion!
given the right time and place
moral of story: just be you.
in stock market nothing is guaranteed
even Tony Pua despite everything he said
end of the day - Najib still rules..
do I like Najib? well it depends..
if he put valuecap 20b to
Glotec
AAX
Flonic
xinghe
PUC..
hihihihihi.....
2015-10-25 18:42
Now dreampredator, let me explain. Firstly the book written by Marcus Aurelius has totally nothing to do with the meditation youre thinking.
So what just happened? You are bringing preconception and belief, you are making assumption without clarifying, now that is very dangerous when it comes to investing. Preconception is a psychological bias that can harm you in investing.
2nd. You do not seek to understand what is the purpose of meditation and you have already shrug off as something zen-like and only monk would do, or some hippie that wants to escape reality does it. So what just happened? You are carrying your ego into conversation thus you do not bother to ask what is meditation, that is very dangerous in investing. You have to constantly challenging your assumptions to minimize capital loss.
Now Stephen Hawking would be disappointed because considered that your intelligence is way above him. Making this kind of mistake is considered a grade 1 mistake. Scientist always challenge their own assumptions, they are not to be treasured.
2015-10-25 18:54
Hello, please have a look at google. that's is a giant castle in the air and its growing and growing. oh ya, it didnt pay dividend for years and years. isn't it a good share?
2015-10-25 21:04
@Paperplane2, at cost of acquire or ttm dividend yield? This is very power company man!
2015-10-26 04:15
Wow, JT. Your response post has become suddenly drastically briefer. Maybe you're hurting inside huh. Maybe very deeply. Good. LOL
2015-10-26 08:31
Since you're such a big fanboy of Marcus Aurelius, JT, I hv decided to gv ya some face by quoting some of his 'meditations', which would rather hv been more rightly termed 'contemplations', or 'ponderings', by my judgement.
And the precise title is, JT, 'Meditations' with an 's', rather than just 'Meditation', hence my initial misjudgement of what it was really all about.
1. “Dwell on the beauty of life. Watch the stars, and see yourself running with them.”
Which was in essence what I was talking about, mixing work with fun.
2. “You have power over your mind - not outside events. Realize this, and you will find strength.”
Got no disagreement with that. Been cultivating this thing for quite a while.
3. “The happiness of your life depends upon the quality of your thoughts.”
This too.
4. “Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”
Oh yeaaahh. One can say that again. And again. And again. And it includes what everyone - including author KCChongNZ - is saying in this thread.
5. “When you arise in the morning think of what a privilege it is to be alive, to think, to enjoy, to love ...”
Same comment as for Philosophy #2 & Philosophy #3
Good day ya all.
2015-10-26 09:26
I agree that dividend is definitely one angle that you should not miss while making an investment decision
2015-10-26 09:33
Ummm ... Ohhh ... Errr ... Welll, a bit of roti canai ain't bad for some chewing. While waiting for the fat, juicy rump steak to cook.
2015-10-26 09:42
Roti canai ... murah murah ... siapa mau, mari mari, lai lai, vangga vangga ...
2015-10-26 11:35
Its now time to post a comparison of a 'Growth Investing' method (a basket of stocks that 'identify' as growth stock clearing certain ratios), vs Value/Dividend Investing methodology (like Magic Formula) and see which of the two performs better over a 5 year, 10 year, 15 year period etc
2015-10-26 14:34
If u buy she 7% div yield without looking into book, this is dangerous! Like jcy!
2015-10-26 21:16
Jpbut then jcy hS strong book! Net cash! High div yield, yet its return sucks. Why??
2015-10-26 21:16
This is interesting to discuss. I used to likejcy, high div yield, good CFO, good book with no much debts. And saying also automation to safe cost. But....
2015-10-26 21:17
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
JT Yeo
There are actually quite a few US companies that have performed as well as Berkshire in the long run, for example Leucadia and Markel
2015-10-25 16:33