kcchongnz blog
Tips for Dividends Investing: A sure cash flow for investors kcchongnz
Many people love regular incomes, especially the retirees who wish to have regular monthly incomes for food, travel and other indulgence in their retirement life. Most investors also love regular income in the form of dividends. Dividends stocks normally form the backbone of their portfolios, providing a steady income through both the good times and the bad.
“Revenue is vanity. Profit is sanity. Cash (dividend) is reality.”
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 38 sen per share dividend from investing in Perstima a year, or a dividend yield of 5.1% at a price of RM7.50 now. You pocket it, use it for consumptions, or reinvest in the same or other shares and in return, get more dividends.
During the bear market, Perstima may go down to RM5.00, but you would not feel too scare as the dividend yield then is 7.6%, more than twice from what you can get from bank fixed deposit. 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.
When the market is too hot, dividend yield keeps us in close touch with the real world. In Bursa, someone pointed out correctly that I won’t invest in a company which incurred huge losses and never pays a dividend, just with the hope that it will earn a lot of money in the future. Think about it, what is my protection when the projection, if any, doesn’t turn out as expected, and without a sen from return of my investment?
Finally, dividend yield prevents you from being side-tracked by events which have little or no real benefits to you as a shareholder, such as bonus issues, share splits, free warrants, property injections by major shareholders, merger and acquisition and other meaningless corporate exercises, high growth, and getting of big contracts which keep on losing money like before etc.
Why not 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 = PE expansion + Earnings growth
Capital gain is of course important, hopefully it is more due to the second part of the equation, the earnings growth which is more dependable, rather than PE expansion due to market environment. The share price will go up because of the growth earnings and hence in dividend. As there is a growth in earnings, and it may follow by PE expansion too. The management must manage the company well so that the company can pay growing dividends.
Does buying high dividend stocks always work?
Not really. Picking the dividend stocks is a tricky process. You should never chase yield because such a strategy may end up costing you more than you ever stood to receive in dividends.
For example, if a company with a dividend yield of 5% suddenly decides to cut its pay-out due to decrease in earnings in half, the stock could fall by as much as 50%.
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% as on 5th May 2017, while the broad market has gone up by about 24% during the same period. AEGB, the former high flier Master Skill Education Group suffered the same fate with 80% loss. Even a seemingly good stock, JCY is not spared with a loss of 50% over the last 5 years, when it was trading at high price of RM1.50 and giving 15 sen dividend then.
Table 1: Return of high dividend stocks in 2012
HBGlobal and AEGB have been making losses, huge losses, and obviously, no more dividends have been distributed since then. The dividend for JCY has cut by two thirds now with a dividend of just 5 sen last year. These are extreme examples, but it shows how damaging chasing yield can be to your portfolio.
However, if one carries out a few checks while embarking on this high dividend yield investing strategy, he can have some amazing positive results.
My experience in dividend investing strategy
Dividend yield investing strategy is one of my favorite investing strategies, together with the Magic Formula. I would talk about dividend yield and the sustainability for all my investment thesis. I would like to share here my experience in this strategy.
At the end of year 2015, I have chosen and summarized 5 dividend stocks to share in i3investor as shown in Table 1 in the Appendix. These are a few checks I used as below, which I think anyone following this strategy must carry out to ensure the success of the strategy:
- Dividend yields at least two-thirds the bank fixed interest rate, currently average about 3.0%.
- Dividend pay-out ratio should be less than a cut-off, say 65-85% so that there is money left and the business can still grow with the reinvestment for potential increase in future dividend.
- 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 with high excess cash for sustainability of dividend payment. With high excess cash, even during the economic downturn, the company is still able to pay good dividends, while continue to reinvest for growth.
- High return of equity and capitals > 12% such that the dividend payment is not only sustainable, but grows from internally generated funds, rather than from borrowed money, and issuance of additional shares which will dilute earnings.
- Good free cash flows from where dividend is paid from internally generated funds, rather than just obscure accounting earnings.
These investment theses were published in i3investor about 1 1/2 years ago as shown in the link below,
http://klse.i3investor.com/blogs/kcchongnz/92727.jsp
All stocks met the criteria as stated above, except for Scientex, with a negative net cash.
This portfolio of 5 stocks has gained an average of 67.4%, with approximately the same median return, for the last one-and-a-half-year period as on 5th April 2017 as summarized in Table 1 in the Appendix, compared to the gain of the broad market of just 3.8% during the same period.
The higher gainers came from those stocks with lower payout ratios, yet with high enough dividend yield of more than 4% when they were picked, such as Scientex (+130%) and Padini (+118%). Although Scientex had a net borrowing in its balance sheet, it has stable earnings and consistent good average free cash flows of 33 sen per share then, almost three times its dividend payout of 12.5 sen. Both Scientex and Padini have high ROEs, and hence adequate internally generated funds to pay dividend, and high expected growth potential.
The checks were used to ensure that the stocks picked with this strategy have stable earnings and cash flows, and healthy balance sheet, and high return on capital for the sustainability of dividends. This also provides the safety in the investments with the principle of,
“Take care of the downside, the upside will take care of itself”.
This was evidence by the extra-ordinary high gains of four of the stocks chosen and the absence of any loser in the portfolio over the last one and a half year.
Figure 1 below shows dividend growth is a key but often overlooked component of dividend analysis.
The companies above, though paying high dividends, had low pay-out ratios as shown in Table 1 in the Appendix, and hence there is scope to reinvest retained profits at higher return of capital, for increased dividends in the future.
Conclusions
I have shown fundamental value investing works very well for me in Bursa as shown in my latest article here on Magic Formula investing.
http://klse.i3investor.com/blogs/kcchongnz/119863.jsp
Investing in high dividend stocks is another high winning but low risk FVI strategy if you can separate the chaff from the wheat.
However, it is very difficult to convince others to follow the fundamental value investing, FVI, just like what Seth Klarmen used to say,
“In value investing, either you get it, or you don’t”.
Few retail investors follow FVI. It is hard work for them. Most of them are sceptical about it. Even for fund managers, surprisingly, only about 5% of them use FVI, according to a successful fund manager in the US, Jean-Marie Eveillard, even though it has proven that it is a viable investment strategy. Just like most people, fund managers have no patience, and they simply can’t afford to follow FVI through as it jeopardises their career, as FVI requires patience, and understandably, few have patience.
The above are some of the reasons why FVI still works, and it works all the time. It even works better in a less efficient market such as that of Bursa.
Hence if one wishes to be more successful than the average of the investing community, he must be different from the crowd, learn about the FVI, and dwell in the forgotten and beaten tracks,
http://klse.i3investor.com/blogs/kcchongnz/120190.jsp
Avoid listening and following hot tips, hopes, hypes and fads. These are the very reason that more than 80 or 90% of retail investors lose money in the stock market.
For those who are keen to learn FVI to build up your wealth, you may contact me at
ckc13invest@gmail.com
You will have some good stocks selling at reasonable prices to invest to build up wealth in the long term, safely but surely. At the same time, you will learn about the magic of FVI, at your own place and time.
Tis goeth down to a fundamental aspect that “An investment in knowledge pays the best interest”- Benjamin Franklin
K C Chong
Appendix
Table 1: Return of dividend stocks as on 5th April 2017
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Discussions
12 people like this. Showing 50 of 54 comments
hi kc, thanks for your sharing. readers would benefit more by reading your articles, rather than those hot tips.
i have been following u for the last 3 years. i have a small request. could you do a write up about focus lumber? because it is in your Stock Pick 2017 and we would like to know more about the fundamentals, ROIC etc. thanks again.
have a good weekend.
2017-05-06 17:54
hi kc, thanks for your sharing. readers would benefit more by reading your articles, rather than those hot tips.
i have been following u for the last 3 years. i have a small request. could you do a write up about focus lumber? because it is in your Stock Pick 2017 and we would like to know more about the fundamentals, ROIC etc. thanks again.
have a good weekend.
2017-05-06 17:54
KC, what is your opinion of BPLANT which consistently pays about 8% dividend/year?
2017-05-06 17:56
Wall Lone Buffalo very smart...he asks other CEOs to pay dividend , he himself never pays dividends.
2017-05-06 18:50
1. Buy good quality growth stocks with durable competitive business advantage 2. High ROE of > 15% 3. High quality earnings that translate into large cash flow from operations. 4. Minimal cap expenditure, preferably < 25% of cash flow from operation, that is, high Free Cash Flow 5. Since company is growing its revenues, and earnings yearly, its FCF too grows as well 6. These companies generally has little debt, large cash flows and can play dividends. 7. Dividend payout ratio preferably between 30% to 70%, though companies like Nestle and DLady pay out almost 100% of earnings as dividends. Buying these companies is the equivalent of buying an equity bond of Warren Buffett. Your return = Dividend Yield + Growth in Dividends.
2017-05-06 19:06
Bull market time dividend stock is the least favorited and cannot go up
Bear market time dividend stock also need to drop
Talk about value trap by the means of dividend
2017-05-06 19:10
If anyone is interested in dividend of 5-7% better put in EPF which is sure gain and no way can go down and loss money
Asb also a good alternative.
2017-05-06 19:21
>>>Posted by PlsGiveBonus > May 6, 2017 07:21 PM | Report Abuse
If anyone is interested in dividend of 5-7% better put in EPF which is sure gain and no way can go down and loss money
Asb also a good alternative.<<<
I think you failed to understand KC's article. :-)
2017-05-06 19:25
Dividend isn't useful in bull market
In bear market also drop too
Donald trump say dividend also need to drop
:))
2017-05-06 19:34
aiyoh, in bull market we not interested whether the company is good or not!!! we just want to hit n run!!!!!!!
2017-05-06 19:39
translated...there is a time for every strategy.
This is X factor time
musangfoxking > May 6, 2017 07:39 PM | Report Abuse
aiyoh, in bull market we not interested whether the company is good or not!!! we just want to hit n run!!!!!!!
2017-05-06 19:54
Posted by walau2u > May 6, 2017 05:46 PM | Report Abuse
Kc, how about your prkcorp? Tq
What about Prkcorp?
Haven't you learned a good lesson on a speculative endeavor on risk arbitrage from the article I wrote on it about a long four years ago. It was free too.
2017-05-07 01:14
Posted by greatnz > May 6, 2017 05:54 PM | Report Abuse
hi kc, thanks for your sharing. readers would benefit more by reading your articles, rather than those hot tips.
i have been following u for the last 3 years. i have a small request. could you do a write up about focus lumber? because it is in your Stock Pick 2017 and we would like to know more about the fundamentals, ROIC etc. thanks again.
have a good weekend.
Glad that you found value in my articles. They are free too here.
Focus Lumber is a magic formula stock, high ROIC and low EY. it is also a good dividend yield stock and good cash flows, and with a clean balance sheet.
It is hence a very safe stock to invest for long-term. It is unlikely to go wrong in your investment.
However, it may not be exciting stock which does not have that kind of fantastic growth prospect due to its business nature.
2017-05-07 01:18
Posted by speakup > May 6, 2017 05:56 PM | Report Abuse
KC, what is your opinion of BPLANT which consistently pays about 8% dividend/year?
I have bought this stock a few months ago and earn good dividend and capital appreciation. Still keep it.
2017-05-07 01:20
Posted by PlsGiveBonus > May 6, 2017 07:10 PM | Report Abuse
Bull market time dividend stock is the least favorited and cannot go up
Bear market time dividend stock also need to drop
Talk about value trap by the means of dividend
Haven't I shown you that the share prices of those dividends stocks in this article that they have gone up in the bad market in 2016, and that they continue to go up during the bulls in the first three months of this year?
What value trap you are talking about?
What evidence you have for your statement?
2017-05-07 01:22
Posted by 3iii > May 6, 2017 07:25 PM | Report Abuse
>>>Posted by PlsGiveBonus > May 6, 2017 07:21 PM | Report Abuse
If anyone is interested in dividend of 5-7% better put in EPF which is sure gain and no way can go down and loss money
Asb also a good alternative.<<<
I think you failed to understand KC's article. :-)
3iii, you are right. i also mentioned in the article this,
“In value investing, either you get it, or you don’t”
2017-05-07 01:26
Posted by musangfoxking > May 6, 2017 07:39 PM | Report Abuse
aiyoh, in bull market we not interested whether the company is good or not!!! we just want to hit n run!!!!!!!
Good on you and best of luck, real luck. You need it. Don’t go out without it!
2017-05-07 01:28
stockmanmy translated...there is a time for every strategy.
This is X factor time
Yeah, in bull market, "dynamite investing."
In bear market,"panic moment".
whatever they mean!
2017-05-07 01:38
Kc, your stock pick is in The edge magazine today!
http://klse.i3investor.com/blogs/greatnz/122310.jsp
2017-05-07 14:10
you see...you are so wrong kc......
it is only in prolonged bear markets, that ratios, and formulas and bankruptcy tests based on audited accounts are invented and plays a significant role...
for now, people are better off reading the whole Annual Report, news and valuations of X factors.
===================
kcchongnz > May 7, 2017 01:38 AM | Report Abuse
stockmanmy translated...there is a time for every strategy.
This is X factor time
Yeah, in bull market, "dynamite investing."
In bear market,"panic moment".
whatever they mean!
2017-05-07 14:16
Most banking stock and tech stock is having most powerful bull run in the century which never been seen before, none of them seem to follow value investing rule
:))
2017-05-07 14:23
carry on...you are on the right track.....
PlsGiveBonus > May 7, 2017 02:23 PM | Report Abuse
Most banking stock and tech stock is having most powerful bull run in the century which never been seen before, none of them seem to follow value investing rule
:))
2017-05-07 14:26
Most powerful bull run stock in Dow Jone
Tech stock Apple Google Amd Nvda Fb...
Banking Jpm Wfc Bac C ...
Crypto currency : Bitcoin, ethereum, ripple,...
2017-05-07 14:30
It is a waste of time to miss this bull run and betting on stock that cannot go up
:X
2017-05-07 14:35
Value investors did not do well this year.
kc also no business.
I hope things will change for the better for him.
in the meantime, I stick to X factor.
2017-05-07 19:47
Wall run but fat also invest in Bitcoin
Wall run but fat is a flipper
:DD
While he teach you to buy value stock which is rigged to look good, rigged by his team. To trap the poor that believe in value, while he get richer and richer selling it.
2017-05-07 20:43
did he?
I always knew Wall Lone speaks from both sides of his mouth.
PlsGiveBonus > May 7, 2017 08:43 PM | Report Abuse
Wall run but fat also invest in Bitcoin
2017-05-07 20:45
Wall Lone likes to tell other CEO to pay dividends but he never pays a single sen.
2017-05-07 20:46
valuations of audited accounts can be taught in universities and become popular memes.
but it is valuations of X factors that are priceless.
2017-05-07 20:53
Who is rich enough to invest in it?
The world richest man
Who is the world richest man?
it is hard to not believe he is not into it while most of his peer who is richest too also involved into it.
Well it is surprising he also involved into gold flipping very long ago.
:DD
2017-05-07 20:55
194) kcchongnz +13.5%
Ranked 194 also must promote loud-loud? Why top 3 no promotion like KC?
2017-05-07 21:00
Posted by stockmanmy > May 7, 2017 08:53 PM | Report Abuse
valuations of audited accounts can be taught in universities and become popular memes.
but it is valuations of X factors that are priceless.
Valuation of audited accounts?
What is that,Mr Accountant?????
Got teach "valuation of audited accounts" in university kah?
Valuations of X factors? You have written thousand times. What the hell is that? X factors? X factors? X factors priceless?
OMG, I am a head full of dew water!!!!!
2017-05-07 22:14
Posted by sell > May 7, 2017 09:00 PM | Report Abuse
194) kcchongnz +13.5%
Ranked 194 also must promote loud-loud? Why top 3 no promotion like KC?
Is there anything wrong of obtaining 13.5% in 4 months?
Promote loud-loud? Got sound ah? Promotion of what?
2017-05-07 22:17
Billionaire Mark Cuban bought a lot of bitcoins at the low.
He didn't need audited accounts for that.
2017-05-07 22:29
Posted by stockmanmy > May 7, 2017 10:29 PM | Report Abuse
Billionaire Mark Cuban bought a lot of bitcoins at the low.
He didn't need audited accounts for that.
Buying bitcoins need audited account one ah? What kind of account is required, Mr Accountant?
2017-05-07 22:36
Hard to resist the "social proof". money game come into my mind.
During the Berkshire Hathaway’s annual shareholders’ meeting, a value investor from China asked Buffett and his right-hand man Charlie Munger for advice on how to spread the value investing philosophy in a market system where so many are speculating.
“There’s always some speculations, always some value investors in the market,” Buffett said.
The problem arises when people start to see others benefitting from playing the market.
“When speculation gets rampant and when you’re getting what I guess Charlie [Munger] would call ‘social proof’ that it’s worked recently, people can get very excited about speculating in markets. And, we will have it from time-to-time in the market,” Buffett said, adding, “There’s nothing more agonizing than to see your neighbor, who you think has an IQ 30 points below you, getting richer than you are by buying stocks, whether it’s internet stocks or whatever. And people succumb to it. They’ll succumb to it in this economy and elsewhere.”
2017-05-07 22:52
Warren Buffet and Charlie munger says....bcos mkt got many speculators and gamblers in a way give alot of opportunity for value investors loh....!!
But value investors need to be discipline and not to succumb to speculative frenzy and stick to time tested value investment loh..!!
Kc is a good testament what value investment should be mah...!!
2017-05-07 23:10
Whenever temptation is getting stonger and stronger, I just remind myself that there are certain type of money out there which are not for me to earn.
2017-05-07 23:28
tip for you...don't buy any thing that makes you nervous. No point one even if it skyrockets after you have bought.
Buy whatever makes you calm.
but
X factor will continue to be a very important of share price for the rest of 2017.
keke > May 7, 2017 11:28 PM | Report Abuse
Whenever temptation is getting stonger and stronger, I just remind myself that there are certain type of money out there which are not for me to earn.
2017-05-08 02:18
Total crypto currency market cap is officially now 52.558 bn USD, or over 200 bn myr worth of market cap, it is more worthy than all klci components plc combined.
:DD
2017-05-08 22:00
It is one of the best investment you can find in this decade
practically you do not spend money to get it, and it compound into a lot of wealth.
Take it for granted work every time
The last time piece of land is very abundant wealth, a lot of people take it for grant with no money down, now they enjoy the wealth from the piece of free land.
2017-05-08 22:49
it is the dividend that made me rich as today. thank kc . i invested in reit for 9 years , with dividend and capital gain , and bplant after it dip to 1.25...i collected huge return from them. no one will believed.
2017-06-13 06:57
Posted by Yippy68 > Jun 13, 2017 06:57 AM | Report Abus
it is the dividend that made me rich as today. thank kc . i invested in reit for 9 years , with dividend and capital gain , and bplant after it dip to 1.25...i collected huge return from them. no one will believed.
Congrats Yippy.
That is partly what business sense is about.
Some others think that they have this, but they can't even articulate what it is. it is merely a business nonsense.
2017-06-13 08:28
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but ah, im small fry trader only. my family waits for me to pay bills, how? dividend need to wait so long and i can't grow my capital =(
2017-05-06 16:39