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Is Dividend Investing Strategy a Myth? kcchongnz
John is an engineer working in Dunlop Industry for about 20 years. He focussed in his career, busy working and earns a good income to put food on the table for a young family. He saved his excess money in a bank earning a fixed interest of about 4%. His elder son is at the age of college education now while the younger daughter is still in secondary school. Exactly 5 years ago, in early January 2012, he met his high school classmate, Michael, who was working in an investment bank and he encouraged him to invest in the stock market to earn higher return to save enough money for is children education. He figured that he needed RM1m for the education expenses for his two children.
John is a risk averse person and he doesn’t like to take too much risks. Michael encouraged him to invest in high dividend stocks which are supposedly to be safer. One such stock Michael suggested was Berjaya Toto, selling at RM4.48 then, with a dividend of 27 sen. The dividend yield was 6%.
Michael further advised John to take up margin finance to make more gains. He emphasized,
“- With the interest of 4.85% in this margin finance, there are many stocks in Malaysia that pay dividend (not to mention the capital gain), which is above 4.85% per annum.
- Why not take advantage of Bank's low interest to seek investment that can give higher returns than 4.85%?”
John followed the advice of his good friend, and used his RM500,000 he has saved, and took up 50% margin finance and all dumped into Berjaya Toto at RM4.48, a sure win gaming and dividend stock as recommended by Michael. Why not? Berjaya Toto is a sure money making machine.
5 years has passed and John continuously receiving his high dividend a few times a year from Berjaya Toto. His dividend income appears to be sufficient to pay the annual interest of 4.85%.
John has a gathering with his classmates a few days ago in Petaling Jaya, and discussed about his investment in Berjaya Toto with his Engineering university mate, Casey, whom he had been having years of mixed rice for lunch and dinner in Lucky Garden 40 years ago. John hasn’t seen Casey for a long time, and surprised he is now in the coaching of finance and investment matters. Casey, being a little savvy in investing, had another meeting with John to review his investment in Berjaya Toto over a cup of coffee at Starbucks. To John’s great surprise, Casey told him whatever dividends he has earned over the years, all have gone to the investment bank, and if he were to sell his Berjaya Toto share now at the price of RM3.32 tomorrow on 16th January 2017, he would have lost a total of about RM120000, or a loss of 24% or of his own capital of RM500k, including after receipt of all dividends through the years. This has not taking into consideration the opportunity costs he has missed.
Does buying high dividend stocks always work?
Investing in dividend is a popular investing strategy for those who are risk averse and wish to have a constant stream of income from their investment. It is particularly appealing to retirees, who have to depend on some regular incomes for their retirement life, without touching on their retirement fund as they are not earning any money from gainful employment.
Most investors believe that investing for dividend is a very safe and sure win investing strategy. However, it may not be, as the return of investment is not only dependent on the dividends you receive, but also the capital gain/loss when you sell the share.
Total return = Dividend + Capital gain (Earnings growth + PE change)
Hence even if you receiving good dividends, if at the end the share price drops substantially, you will make an overall loss.
Some dividend lemons
Table 1 in the Appendix shows a red chip company, HBGlobal, paid a dividend of 3.8 sen a share when its share was trading at 55 sen, or a dividend yield of 6.9%. If you have purchased HBGlobal on 30/5/2012 and keep it until now, you would have lost a whopping 86.7% as its stock price plunged to 3.5 sen now from 55 sen, while the broad market has gone up by about 17% during the same period.
AEGB, the former high flier Master Skill Education Group suffered the same fate with 77% loss, if you have bought it at RM1.08 5 years ago, with a high dividend yield of 5.2%.
Even a seemingly good stock, JCY, one of the biggest hard disk manufacturer in the world, was not spared with a loss of more than 50%, if one has bought it at RM1.50, enticed by its high dividend yield of 6% then.
Recent Return of Dividend Funds in Bursa
As on 13th January 2017, I managed to find four unit trust funds with clear dividend yield investing strategy from Fund Supermart, Malaysia, investing in Bursa. The returns of the four dividend funds are shown in Table 2 in the Appendix.
The funds returned average compounded annual rate, CAR, of -0.48%, 1.87%, 1.61%, 5.5% and 9.5% for 1 year, 2 years, 3 years, 5 years and 10 years respectively. The return is better if the investing horizon is longer at 5 years and 10 years respectively. However, these “better” CAR are just single digits returns and hence nothing to shout about.
The average CAR for the last three years was dismal at best, with negative return the past one year, and less than 2% for the two and three years CAR. This was also partly due to the poor performance of the whole market this three years.
The average return of the 4 funds is generally higher than the broad KLCI Index, skewed by the high return of AMD Dividend Trust, which has done very well. Otherwise the average will be worse. The comparative return of the funds would be even worse if the one-time upfront fees were included when investors first put money in the fund.
Does it mean that investing in high dividend stock is a myth? Not at all. On the contrary, I found it is one of the best investing strategies to obtain consistent long-term return with less risk.
This is provided investors have a check list of how and what to look for to separate the chaff from the wheat. That will be the next topic of discussions.
KC Chong
Table 1: High dividend stocks in 2012
Table 2: Return of dividend investing funds in Bursa
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Discussions
8 people like this. Showing 50 of 67 comments
Quoting BJToto as a "Div investing" is totally wrong.
The important keyword is growth both in div and company profit.
2017-01-15 22:54
Revenue .....> earnings .....> .FCF .....> retained earning + dividends.
You can choose to invest in companies throwing growing dividends (dividend growth investing).
As I have posted earlier, stock selection is still the key.
2017-01-16 08:52
This article had given a very BAD impression of "Div investing"
KC should use his knowledge & experience to show readers what is a "Good div investing".
2017-01-16 09:03
The only permanent in universe is impermanent. There is no exception in the world of investment!
The underlying fundamental in business keep changing in tandem with changing conditions in the marketplace; thus affecting the earning pillar of company.
You got to know that investing in dividend stock is you accepting the fact there is a limitation in earning growth potential in that company. You got to accept the fact that the risk inherited in the dividend stock begins to emerge when the earning stability is disappearing.
You can uncover the myth of dividend stock If you command the comprehensive knowledge in the industry. This will allow you to align your investment strategy in line with the competitive condition in that company.
Ultimately, you never do nothing with dividend stock when the underlying earning is threaten.
When there is no constant earning, there will be no constant dividend !
2017-01-16 09:11
The fact that the constant changing in the marketplace make investment an exciting game.....dividend stock can turn into growth stock...
KC, I think it might be more beneficial here if you focus your write up on:
why investing in dividend stock a failure strategy ? or
The fundamental dividend investing strategy - uncover the myth.
2017-01-16 09:29
Posted by Bruce88 > Jan 16, 2017 09:03 AM | Report Abuse
This article had given a very BAD impression of "Div investing"
KC should use his knowledge & experience to show readers what is a "Good div investing".
This article reminds one not to blindly invest using any strategy, including dividend investing. The underlying message is in the last part of the article,
" Does it mean that investing in high dividend stock is a myth? Not at all. On the contrary, I found it is one of the best investing strategies to obtain consistent long-term return with less risk.
This is provided investors have a check list of how and what to look for to separate the chaff from the wheat. That will be the next topic of discussions."
2017-01-16 09:31
Posted by R3D3 > Jan 16, 2017 09:36 AM | Report Abuse
Chong: It would have been much better if you had focus on the risk of dividend investing.
ME: DIVIDEND INVESTING IS ACTUALLY A LOW RISK STRATEGY COMPARED TO OTHER STRATEGY, ESPECIALLY APA ITU DYNAMIC INVESTING, "PIVOTAL MOMENT CONCEPT" AND ALL THAT JEST.
Dividends, are largely determined by the company board of directors and is influenced by the company profitability. No money, no honey. Hence, dividends is not a constant factor.
ME:NOTHING IS CONSTANT IN INVESTING. BUT IT IS MORE PREDICTABLE FOR SOME COMPANIES, THEN OTHER PREDICTIONS.
* eg. how many people make many assumptions that their dividends is cast in stone?
ME: THAT IS WRONG. NOTHING IS CAST IN STONE, FOR ANYTHING IN INVESTING, NOT ONLY DIVIDEND.
The dividend yield is determined by two variables which are not constant. The price of the stock is not constant and neither is the dividend.
ME: DIVIDEND IS A LITTLE MORE PREDICTABLE FOR COMPANIES WITH CONSISTENT EARNINGS AND CASH FLOWS. THERE ARE SOME STOCKS HAVING THAT CHARACTERISTICS.
PRICE IS OF COURSE NOT CONSTANT. IN FACT, IT CHANGES EVERY MINUTE.
HOWEVER, WE HAVE TO MAKE A DECISION ON WHAT IS THE DIVIDEND YIELD AT A POINT OF TIME WHEN WE ARE CONSIDERING TO INVEST WITH DIVIDEND INVESTING STRATEGY; I.E. AT THE TIME OF A CERTAIN PRICE, AND HENCE THE DIVIDEND YIELD. IF THAT PRICE GIVES A HIGH DIVIDEND YIELD, MAY BE GOOD TO INVEST, AND VICE VERSA.
2017-01-16 09:57
Old world stocks like Dlady, HEIM, Carlsbg, Panamy, Uplant, Pbank, BAT, Nestle are good dividend stocks. If they are bought 10 or more years ago, they would ahve made you very rich, not only in terms of dividends but capital appreciation. Increasing Dividends = increasing share prices (Dr Neoh Soon Kean).
Question now is: can we unearth potential stocks to follow above examples. Padini? HaiO? Scientx? Magni? Ptaras? Kmloong? ...?
Or wait for opportunities in the old world stocks?
Over to you , KC.
2017-01-16 10:04
Posted by R3D3 > Jan 16, 2017 10:07 AM | Report Abuse
Chong: Needless to say, I wasn't focusing on you or your abilities. That was a general comment on personal observation.
Have you not seen someone buying a stock, assuming that the xxx dividend a stock gave last year, would be repeated the following year? And based on the xxx dividend, they formulate their yield and declare their stock is a great investment? How many times have you seen such investment crash and burned? I have seen far too many examples of 'Berjaya Toto' type of 'dividend investments' fail.
Also, I do have to say, the reply in CAPS is not pleasant reading.
The capital letters were used to differentiate your comments and my reply. Since you didn't like them (I can't control what you think), I will suit you and use small letters.
I would like to see your examples of bad dividend stocks you were talking to add to my list.
As I have said, you have to use a price at the point of time when using investing in dividend strategy, to make a decision on if the dividend yield at that price is good to invest or not.
If not, how else do you make decision?
2017-01-16 10:30
Posted by ckkhen > Jan 16, 2017 10:04 AM | Report Abuse
Old world stocks like Dlady, HEIM, Carlsbg, Panamy, Uplant, Pbank, BAT, Nestle are good dividend stocks. If they are bought 10 or more years ago, they would ahve made you very rich, not only in terms of dividends but capital appreciation. Increasing Dividends = increasing share prices (Dr Neoh Soon Kean).
Question now is: can we unearth potential stocks to follow above examples. Padini? HaiO? Scientx? Magni? Ptaras? Kmloong? ...?
Or wait for opportunities in the old world stocks?
Over to you , KC.
ckkhen,
For the old world stocks, values are presented normally during market down turn. It is hard to find good dividend stocks during normal time for high extra-ordinary return. But during bad time, buy as much as possible when their stock prices are beaten down.
In normal time, I tend to focus on the later category. You can still find many good buys there. If you check back the list of dividends stocks I have given you every month, you should see they provide you with very good return so far.
My opinion is, stay invested. The market is not at euphoria, and we can miss good opportunity by waiting.
"80 percent of success is just showing up?" Woody Allen
2017-01-16 10:54
high dividend yield stocks are often generalised with stable ones when in reality it may not be. especially some stocks which only pay 1 or 2 years of high dividend/dividend is expected to fall in line with earnings
dividend depends on that year's earnings and cashflow while price movement depends on market expectations on the company. good companies' price will rebound at least to the level before adjusted for dividend after ex while others the market will just let it slide, then at most will be like taking money from your left pocket to put into the right pocket
2017-01-16 11:17
Posted by R3D3 > Jan 16, 2017 11:08 AM | Report Abuse
Chong: I can tell story of this girlfriend who has been doing Amway for 10 years. She worked hard, made good money. Not too long ago, she invested her hard earn money in the stock. Not exactly sure if it was 2013 or 2014. Last year, she exprsessed her disappointment with her decision to invest in Amway and regretted listening to her peers that Amway was paying good dividends and that whatever dividends she has received, could not cover her losses in her investment.
Excellent example. Thank you.
2017-01-16 11:28
Posted by Jay > Jan 16, 2017 11:17 AM | Report Abuse
high dividend yield stocks are often generalised with stable ones when in reality it may not be. especially some stocks which only pay 1 or 2 years of high dividend/dividend is expected to fall in line with earnings
dividend depends on that year's earnings and cashflow while price movement depends on market expectations on the company. good companies' price will rebound at least to the level before adjusted for dividend after ex while others the market will just let it slide, then at most will be like taking money from your left pocket to put into the right pocket
Excellent comment. Thanks jay.
2017-01-16 11:30
Posted by R3D3 > Jan 16, 2017 11:08 AM | Report Abuse
Chong: I can tell story of this girlfriend who has been doing Amway for 10 years. She worked hard, made good money. Not too long ago, she invested her hard earn money in the stock. Not exactly sure if it was 2013 or 2014. Last year, she exprsessed her disappointment with her decision to invest in Amway and regretted listening to her peers that Amway was paying good dividends and that whatever dividends she has received, could not cover her losses in her investment.
It is just like a long time PBank or F&N employee decide to buy these shares at 20.00 or 23.00 respectively now bcos they have been giving good dividends. A case of buying wonderful companies at lousy prices. Nothing wrong with dividend approach if they have bought these shares at good valuation prices. Mistake is they bought at the wrong time. That is why dividend knowledge/FVI comes in to save the day.
2017-01-16 11:31
Dear master kcchongnz,
need your advice, i had bought a lot of complet (Complete logistic berhad), but share price hardly move @ pe around 5.5. can give me some advise?
2017-01-16 11:35
Posted by 10bagger10 > Jan 16, 2017 11:35 AM | Report Abuse
Dear master kcchongnz,
need your advice, i had bought a lot of complet (Complete logistic berhad), but share price hardly move @ pe around 5.5. can give me some advise?
Don't know much about Complete. May be because it hardly gives any dividend. Without dividend, how do investors know the company really makes money?
Or maybe the earnings are very erratic and volatile.
2017-01-16 20:06
Raider like to sum up loh...a dividend stock paying is of course better than div paying stock loh...!!
If u focus on dividend paying stock, u must look into dividend sustainability, cashflow, earnings loh....!!
Do not focus on just div loh....!! Look at the past yrs of div paying track record loh...!!
If got growth and even margin of safety , even better loh.....!!
Never...never ...never sailing on 1 single stock, preferably portfolio 8 to 10 stocks of reasonable proportion loh....!!
Also use your head...do not overpay loh....!! Like Pet dag PE 25x...getting div yield of 3% pa high risk loh....!!
Alternative Nestle Rm 78.00 giving PE 25x with div yield of 2.5% pa high risk loh...!!
Always have an understanding of FD rates and Dividend yield loh...!!
They are related...a high FD rates means u need to get div yield and vice versa mah....!!
2017-01-16 20:54
i am a dividend lover. i started to invest in reits 8 years back when no one seem to look at it..after collecting 8 years of steady dividend and with price appreciated some more than 70%, i made huge huge profit by 7 figures after selling off last year when all reits were at peak. a man meat is another man poison .do not conclude when you are not in it, only gainer will smile all the times. I am so lucky to be on of them.
2017-01-17 04:07
Bplant another example, two years dividend added up 25 sen , price once dropped to 1.17 , ipo at 1.60, land bank value in billions, many people missed when price dropped to dirt cheap, now at 1.67, if you accumulate a million share, you will be making six figures in two years.
2017-01-17 04:35
of course you will not talk about FGV right, you lose you pant if you go in, because you believe some sifus shouting buy buy buy.
2017-01-17 06:03
Yippy68 friends I am also like dividend, however I bot Magnum when 2.50 now at 2.09.
can you advise me should hold or can advise magnum still worth to hold
because many people ask me to cut because magnum is a sunset biz like Parkson
Parkson drop from 9.00 until 0.60
Now I very scare and worry about magnumI also got media but Media got GLC protect so Media I no worry at all even I enter at high price.
Just this Magnum I really worry will nofollow Parkson Parkson drop until no underwear as we know
So if Yippy68 free please advise on magnum.
And why many people like TOTO than magnum TOTO still trade around 3.00 but Magnum near 2.00
LAst time magnum and toto every q also same give 5sen dividend now toto give 4 magnum give 3 and magnum so stupid , latest qr profit jump 44% but give 3sen only ,Be fair must give 4sen as publice expecetd
2017-01-17 15:03
Angielim9955,
compare roe, fcf, fundamental ...
have u done ur homework b4 u buy?
2017-01-17 15:06
Magnum ....raider remember split into 2 different co mah....!!
Have u factor this is to ur investment return leh ?
2017-01-17 15:09
I think two criteria need to be met before could qualify as dividend stock:
a) The annual dividend yield must more than the current fix deposit rate.
b) The dividend yield on (a)must be maintained for 5 years.
perhaps, with this definition, your investment mind won't be confused and you will think rationally.
kikikiki
2017-01-17 15:32
You might want add following criteria for tracking:
c)The earning consistency.
kikiki
2017-01-17 15:36
Is there any master in stock market???? You must be insane!
The master of today might be turn into loser of tomorrow!
LOL
2017-01-17 17:14
Posted by datuk > Jan 17, 2017 03:32 PM | Report Abuse
I think two criteria need to be met before could qualify as dividend stock:
a) The annual dividend yield must more than the current fix deposit rate.
b) The dividend yield on (a)must be maintained for 5 years.
perhaps, with this definition, your investment mind won't be confused and you will think rationally.
RAIDER ADD MORE CRITERIA LOH....!!
C)THE SUSTAINABLE CASHFLOW MUST BE MORE THAN DIVIDEND PAYOUT.
D) PREFERABLY PROFIT FAR EXCEED DIVIDEND PAYOUT LOH...!!
E) DEBT LEVEL LOW LOH...!!
2017-01-18 10:53
in Malaysia, I can offer you advice of getting return 6% with minimal risk (near /absolute 0.01% risk) without charging you any money.
Go to PNB and get your money vested in Amanah Saham if you can't take any risk.
Sincerely,
CFTrader
2017-01-19 09:33
As deposit accounts pay very low interests or next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.
2017-01-19 09:47
So just buying the shares with the highest dividend, without researching how safe that dividend is, can be a mistake.
There are now a huge range of high yielding blue chips but it is best to look for a dividend that is less likely to be cut even if that company's profits fall.
2017-01-19 09:50
A high yield alone is not synonymous with a decent dividend.
If you carry out thorough research and pick the right shares, you will get better value for your cash than by leaving it in a savings account.
2017-01-19 09:52
Once again, for those who invest for yield or income - either Dividend Yield Investing or Dividend Growth Investing - STOCK SELECTION is still the key.
2017-01-19 09:54
Search out for those companies that have a good chance of sustaining or even increasing their dividends.
If you are knowledgeable, you can even anticipate and avoid those companies that may skip or reduce their dividends in the future.
Stock selection is the key to dividend yield investing.
2017-01-19 10:01
Some investors look at historic yields; some at forecast (or "prospective") yields.
But either way, those yields can be unexploded mines, lurking for the unwary. Looking at yield on its own, in short, can quickly introduce you -- painfully -- to the meaning of the term "yield trap".
2017-01-19 10:16
The yield trap is simply explained.
You buy a share, attracted by the high yield. But the dividend is then cut, or cancelled -- leaving you without the anticipated income. Worse, unsupported by the payout, the share price usually falls as well, leaving you also nursing a capital loss.
Let's see it in action.
Company A pays out 9 pence a share, with shares changing hands for 100 pence per share. So the dividend yield -- which is the dividend per share, divided by the share price, and multiplied by a hundred to turn it into a percentage -- is 9%.
But that 9 pence is unsustainable. Company A then halves its dividend, slashing investors' income. What happens to the yield? If the share drops to -- say -- 80 pence, the historic yield the becomes 5.6%. The "yield on cost" figure, of course, is 4.5%.
2017-01-19 10:17
Dividend cover
How, then, should investors spot potential yield traps? The most obvious reason for slashing the dividend is that the business simply hasn't got the money to pay it.
The business's earnings, in short, aren't large enough to support a distribution to shareholders at historic levels.
Put another way, actual earnings per share aren't sufficiently large when compared to the anticipated dividend per share.
Which is where the notion of 'dividend cover' comes in: earnings per share divided by dividend per share.
2017-01-19 10:19
Interpret Dividend Cover with care
Now, dividend cover shouldn't be followed blindly.
Some businesses -- such as utilities, for instance -- can quite happily operate with lower levels of dividend cover than more cyclical businesses.
Other businesses -- such as REITs -- must pay out a fixed proportion of earnings as dividends, so again a low level of dividend cover is the norm.
Still other businesses have very high levels of dividend cover, because they are growing -- and therefore retaining earnings for future investment -- rather than paying them out as dividends.
But as a broad brush generalisation,
- A ratio of close to one is definitely the danger zone.
- A ratio much bigger than two indicates a certain parsimony.
- A ratio of 1.5-2.5 is usually what I'm looking for.
2017-01-19 10:20
worth to take a look at Zhulian now as the fundamentals have improved and the company is growing to other indo china countries. Can also watch out for Uchitec
2017-02-03 16:20
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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....
stockmanmy
alphabeta is of the school that says, if you can make it complicated enough, you will surely be rewarded for your hard work.
But reward is not from hard work alone but from fitting the methodology to the behavior.
2017-01-15 22:40