Is Buying High Dividend Stocks A Wise Choice?

I've been very busy the past few weeks and have not been blogging much on investments. My apologies to readers who want to read more on investments here. In the midst of investing for the past few years starting from 6 years ago, to be honest, it was not always a smooth sailing one. I have made mistakes, learnt from it and moved on. To date, I've come to realised my own investment style and manage my risk accordingly. There are stocks which has huge percentage loses in my portfolio but because they make up only 1-2% of my entire portfolio, the losses are really negligible in monetary terms. If I had invested heavily in those stocks, I would have lost a lot of money. Even after 6 years of investing, I'm still learning the ropes of it. Market has been relatively sideways with a few irritional downward spins which presents good opportunities.

Buying high dividend stocks has been a favourite among Singaporeans. REITs are very popular here because of the higher dividend nature. But, is buying high dividend stocks a wise choice? In this post, I will back test a few high dividend stocks and see the returns we would have (inclusive of dividends) if we had invested at that time.

Let's start of with a popular stock, Capitaland Mall Trust:

Capitaland Mall is a sideway stock where the price have not really increased for the past 5 years. Let's take for example if we had invested around the mid price of the chart in 2012 where the small hand is, the price bought would be 1.925. The price now is 2.14 so there is some capital gains but not much. It would just be 11.25% gain in 4 years. But, if we had added in the dividends received, the gains would increase to 34.54%. This shows that the dividend received makes a difference if we had bought this stock.

Now, what if a stock price has dropped over the years but this is a high dividend stock? Would we still have profits? An example is Hutchison Port Holdings trust which was a high dividend stock many years ago. However, its stock price dropped by almost half in the past 4 years.

Now, if we had bought in 2012 at around 0.75, would we still have profit today? The answer is no. At one point in time, this stock was giving as high as 10% dividend yield. If we had invested back in 2012, the losses would have been more than 40%. But, if we include dividends received, the losses would reduce to about 10%. This seems like dividends still do make a difference.


Buy dividend stocks but don't look at dividend yield only

Dividends can definitely get us more money in our investment portfolio but it would be pointless if the share price drops too much that the dividends collected don't even cover the losses due to drop in share price. The best combination would be the share price increases and we still get dividends. In such scenarios, we can expect the dividends to increase too if the company is making more money and wants to reward shareholders.

In investing, we can look at a few other key statistics in order to invest at the right price. They include:

1) Valuations such as Price to Earnings, Price to Book
Read: Buying the company on the streets (Part 2) - When to buy?

2) Industry outlook and Economic Moats
Read: How to pick stocks (Part 1) - Economic Moats

3) Track record and profit growth
Read: How to pick stocks (Part 2) - The profitability of a business

A point to note is that there is no holy grail to investing. Over the years, I realised even if we follow another successful investor's style, we may still not be successful in investing. This is because no two investor will have the same capital or the same portfolio for investing. Everyone of us invest different amounts to each individual stock and also have different number of stocks in our portfolio. For example, investor A may invest $5000 in a stock and investor B also invest $5000 in the same stock. When the stock price drops by half, each of them looses $2500. However, the difference is investor A has a $100,000 stocks portfolio while investor B only has a $10,000 stocks portfolio. In this case, investor A looses only 2.5% while investor B looses 25%.


How I manage Risk in my stocks portfolio

I've also come to realise that risk management is very important in stocks investing. How I manage risk is simple, if I feel that a certain stock is my portfolio is risky, I will reduce my exposure in it. Risk can be in the form of declining profits, poor industry outlook, uncertainties and poor balance sheet. There is always an opportunity with under-performing stocks but my personal preference is not to have too much exposure in it. That's why some people say its a punt for speculative stocks which is risky by nature.

For stable stocks and those with a strong balance sheet, I would increase my exposure in it. But, this is bearing in mind that I do not buy the stock at a high price base on the valuations. It is important to understand how to read financial statements and determine if the company is worth buying at that price. We can use ratios such as PE, PEG, Discounted cashflow/earnings, PB etc to determine valuations. This has to be reviewed periodically as things could worsen in the future.

One stock which I've held on and increased my exposure to a large extend is Saizen Reit. This Reit has relatively good dividends at about 7% and stable growth. The rationale is simple, this is a REIT which owns and rents out residential properties in Japan, is undervalued and also Japan was starting to do a major QE at that time. Rental residential properties are in demand in Japan because of the high price of properties there. It is also much more stable as compared to retail or hospitality which can be affected by economic conditions easily. Saizen Reit has since been acquired and reverse take over by another company which sent the share price up.


Is Buying High Dividend Stocks A Wise Choice?

So Is Buying High Dividend Stocks A Wise Choice? Dividends can indeed boost the returns in our portfolio and also provides an additional source of income. It can be quite significant if we have a large investment capital to begin with. Some of my other blogger friends have more than 5 figures a year for dividends.

But don't just focus on dividend yield alone. If the stock price drops too much, it is not a wise choice then. Learning to pick good dividend stocks is the key.

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Finding Your Own Suitable Investment Style

Many of us may wonder what is the best way to invest our money? We see and hear many successful investors making tons of money from the stock market and try to follow their footsteps but fail miserably. How is it possible that these investors can be so successful but when we follow their footsteps, we still end up failing? The reason is simply because we did not first find our own suitable investment style. In this article, let's find out how we can find our own investment style so that we too can be successful in investing.

Finding Your Own Suitable Investment Style

There are many ways to invest and each of us have different risk appetite. Investing is partly a psychology game where if we invest beyond the level of risk we are willing to take, it can drive us crazy to make stupid decisions.

In our quest to find a suitable job for our careers, we may see many successful individuals who are in the sales line such as property agents, insurance agents etc. We may think that maybe joining this industry will make us successful too. In the end, many young people join, and many leave also.

Finding a suitable investment style is crucial in our investing journey. To know what is our own suitable investment style, we must first know the different styles of investing.

Trading in the stock market

The first and most common style is trading in the stock market. I wouldn't consider trading as a type of investing but since many people mistake trading as investing, I feel I should mention it in this article.

Trading offers the potential of high returns. Making thousands of dollars per month can be a reality. We even see advertisements where we can use a software to trade successfully then quit our jobs or use only a few hundred dollars and make thousands of dollars. Making money always attracts people to join in just as in investment scams which offers very high returns.

Yes there are successful traders around but they don't just appear out of nowhere. They have experienced failures before and learnt from their mistake. However, what made them successful is not just the skills or the experience they have but its because trading is their style. If you're a low risk taker who cannot sleep at night because of a few thousand dollars portfolio loss, then trading is not for you.


Investing like Warren Buffett

The next common style is to follow the investment philosophy of Warren Buffett, a very successful investor in his time. Many people read about Warren Buffett and are amazed that he can make so much money in investing. They try to learn his methods of calculating intrinsic value, value investing etc.

Yes calculating intrinsic value and learning value investing can help us buy companies at cheaper valuations but investing is all about business. If we blindly follow the financial ratios such as PE, PB or even intrinsic value, it won't really make us successful investors. Warren Buffet himself said that a young person should learn the skills of accounting as this is the language of business. To learn Warren Buffett's style of investing is to understand a business totally so that we can buy good business with potential. If we get bored reading financial statements in an annual report, probably following Warren Buffett's style of investing is not our style of investing


Investing For Income

Investing for income is a popular investment style in Singapore as we have the opportunity to invest in high yielding investment products such as REITS etc. There are REITS listed in Singapore which gives as high as 10% yield. If you're not sure what REITS is all about, read here.

Nevertheless, investing for income is not suitable for everyone too. It can be a slow process of seeing your money grow. If you're not a person who have the patience to slowly accumulate to grow your money, then investing for income may not be your investment style. I've been investing for income for quite sometime now and see the benefits of it as this is my investment style. It is over a period of a few years then I realise that when I patiently accumulate and buy in more while getting the yield, the investment return was much higher and more stable than when I invest using other styles.

Investing for income is not about finding the highest yielding stock which you can get out there. If it was that easy, everyone would be rich. It is about finding the right stock to get the right yield and having the patience to accumulate while getting the income from the stocks.


Investing in Funds/Unit Trusts

Investing in funds or unit trust in another way to grow our money. This style does not require us to read up on individual companies but instead, we invest in a more macro view of industry and sectors. We can also invest base on countries. A fund is made up of many individually companies which represents the industry or sector. We can view the fund performance and decide whether to invest in it.

Another popular option is low cost index funds which is easily accessible to investors now in Singapore. You can read more about index funds here.


What Is your investment style?

After reading on the various different investment styles, what do you think your own investment style is? It took me sometime to finally find my own investment style so be patient, it may require some trial and error to eventually find the right style that suits you.

A tip on finding your investment style is to take making money out of the equation. Once you do not think about making money, are you still passionate to learn the ropes of that investment style? If you are, then that could be your investment style which you're suitable for. Some people prefer to invest by themselves, analysing and researching on companies while some may choose to invest in funds through their financial adviser. Ultimately, investing is for the long term and should not be for any short term gains. I hope this article helps you to understand your investment style better.

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The Silent Killer Of Successful Investments

When I first started investing, I thought about how good it would turn out, how investing can be the answer to a better life. I went for seminars where the speakers promised good returns if you learn it correctly. With much hope and expectations of a good outcome, I started investing.

10%, 20% returns were easy at first. Maybe it was beginner's luck, I made over $1K in a short period of 3 months with just only $5K. That was 20% return on investment. If you ask me what was the factor behind the success that time, I would have told you it was because I expected it. However, I was totally wrong. The reason why many people fail in their investments is not just because of a lack of knowledge or luck, it is having the wrong expectations.


Expectations

Fast forward to one year later, I lost everything and more. In fact, I lost half of my savings which I painstakingly saved through my allowances during my school days, the many part time jobs I worked while still studying and the little NS allowance I got. The savings were built up a dollar at a time and I saved so hard by working part time. All the savings for 5 years were wiped out in just a few months. I had many sleepless nights due to insomnia, I didn't know what to do and was totally lost that time.

All these taught me to have a more realistic expectation for investments. In fact, not only just investments but it taught and humbled me on the expectations of life. Sometimes, we have so much expectations that it makes us unhappy when those expectations go unmet, it strains relationships too. For investing, it caused me to lose the hard earned money I saved up. This was a lesson that will not be forgotten.


There is no easy money

If you're thinking investing will be your easy way out in life to give you more money, you may have the wrong expectations. There are people who believe that they can double or triple their money easily through the stock market or think that trading is an easy way to make money so you don't have to work. All these are easy money thinking. Be careful of this as it may land you into trouble with the stock market.

Wanting to make more money from the stock market will indirectly cause you to take on more risk. In the pursuit for more money, people get into speculation to pick the next hot stock. "This stock may be the next big thing and will go up 10 times!!" If this is what you heard, its speculation. Yes it may go up 10 times but what if it went down and worse still collapse instead? We may lose a lot of our money or even everything.


Reality isn't all that bad

Even though there are no easy money, reality isn't all that bad either. Growing our wealth through investing is still important. As we all know, the purpose of investing is not only to preserve wealth but to build up our wealth for retirement. If we do not invest, our wealth will deplete over the years due to inflation.

I have not been good at Maths since primary school. I was careless with numbers and always make silly mistakes during my mathematics exams and tests. To grow our wealth, we need to have plans and see it happen in the future. Fortunately, even for people like me who are not good with numbers, there is an easy way to see how our money will grow in the future.

The rule of 72 is the easiest way to see how much our money would grow. At 7.2% investment return annually, our money would double every 10 years. How you get this number is take 72 divided by 7.2 and you get 10 years. If we have 10% annual investment return, our money would double every 7.2 years. You can just take 72 divided by the annual investment return and you will know how long your money will take to double.

With the rule of 72, I can plan for my future easier. If I want to double my money 3 times in 30 years, I would have to achieve 7.2% ROI every year. $200,000 would become $800,000 30 years from now using this calculation. This is assuming we have $200,000 and stop saving money now and just grow our money through investments.

One lesson from this is the more we save earlier, the faster it is to reach our financial targets later.

This was an example I read before on 2 person, Ben and Arthur.  At age 19, Ben decided to invest $2,000 every year for eight years. He picked investment funds that averaged a 12% interest rate. Then, at age 26, Ben stopped putting money into his investments. So he put a total of $16,000 into his investment funds.

Now Arthur didn't start investing until age 27. Just like Ben, he put $2,000 into his investment funds every year until he turned 65. He got the same 12% interest rate as Ben, but he invested 23 more years than Ben did. So Arthur invested a total of $78,000 over 39 years.

When both Ben and Arthur turned 65, they decided to compare their investment accounts. Who do you think had more? Ben, with his total of $16,000 invested over eight years, or Arthur, who invested $78,000 over 39 years?

The result above shows the stark difference and the power of compounding. Ben just saves earlier at age 19 and stops saving at age 26 but in the end he has more money than Arthur who saves and invest from age 27 to 65. Just that 7 years difference makes a very big difference because of the power of compounding.

Expectations kills successful investments but the reality isn't that bad either. The road to wealth building is easy: save early, invest early and let the power of compounding take effect. There is no shortcut to wealth building. Expecting that investing will make you rich in a short time is a dream but getting back to reality that the effects of compounding has on the long term will create successful investments for us.

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The Art Of Investing

Investing seems like the easy way where we can make our fortune or can give us a hope for a better life. There are so many ways to investing and each one of us have different investment styles and strategy. There is never a one size fit all approach. To me, investment is more of an art than a science.

I've been investing for the past 5 years and there are certainly ups and downs in my investing journey. I would say that over the years, I've come to realize that investment is really an art. We can have the best investment knowledge but in the end still lose money from our investments. There is no guaranteed way of making money from our investments.

With that, here are some pointers for those who are just starting out investing or even if you've been investing for quite some time, I hope these reflection of mine will be beneficial for you too.

1. Focus on taking care of the downside, not on making money

Risk management is very important in investing. We do not want to put all our money into one stock or one investment thinking that its going to make us a lot of money. Even if you've researched about this company for many years, situation can still take a u-turn, catching us off guard.

In this era where information moves very fast, competition can come in very fast too and affect a company's profit entirely. Nokia and Siemens were two of the biggest mobile phone and telecoms giant 10 years ago but now they are defeated by competition from Apple and Samsung. Kodak was one of the biggest photographic film company many years ago but it has now been replaced by digital cameras and smart phone cameras.

In investing, we should think about how much we are willing to lose and if we lose this amount will we still be able to live our lives normally? It would be foolish to borrow money for investment as we could lose more than what we have in an instant. That to me is too much risk. I would only invest the money I am able to lose.

2. Investment is not a get rich quick scheme

Do not treat investing as some kind of scheme where you can get rich quick very fast. This happens mostly for people who do not have too much money now but want to have more money faster. The temptation of getting huge passive income and double or triple the money we have from investing is always there.

It is true that we can get passive income and capital gains from investing. But it certainly does not happen as fast as we thought it would be. It would be prudent for us to manage our expectations of the investment returns which we can get from investing. Is 10% p.a achievable in the long term or maybe just 5% p.a? I would say it is not easy to make more than 15% investment returns consistently for many years. You may be lucky for a few years but things may turn around.

3. Focus on accumulating more capital from other sources

Throughout the years, the capital I accumulated did not come from investment mostly. It came from the income I had from work and other active income. While we are investing and learning all we can to grow our money, do not forget to build up your skills and increase your active income as well. The more income you have, the easier and faster it is to save money provided you do not spend it all away.

A person who has accumulated 1 Million dollars can just invest with an investment return of 5% and he will get $50,000 a year. If we only had a capital of $50,000, 5% investment return is just $2500 which is not a lot.

Over the years, I have been trying to create multiple streams of income. Today, I have income from at least 4 different sources. It wasn't an easy task and requires a lot of time and effort. What I want to highlight is most of my income still does not come from investments alone. It comes from learning new skills and working hard to increase my active income. Passive income, although important, does not come easy and fast. My passive income has been increasing but its still not a significant amount yet.


In conclusion, investment really takes experience. Getting your hands dirty, falling and picking yourself up and going through some pain in order to learn it the hard way is part and parcel of the the process to invest better. Sometimes, it does require patience to ride through cycles and see your investment profit after a few years. Yes, sometimes it takes years to see results. Those who have the patience will get to eat the fruits at the end.

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Related Posts:
1. The Top Down Approach To Investing
2. Why extreme savings is more powerful than investing

What To Do When The Stock Market Keeps Going Down?

Stock market volatility is back in action after so long now. I've been investing the past 4 years and most of the time the Singapore market has been rather stagnant. The only time I encountered a severe market drop was in 2012 when several European countries were having trouble which was called the sovereign debt crisis. It was a serious issue as it can mean countries going bankrupt which will trigger a big global recession. In 2007/08, Lehman brother collapsed during the sub-prime mortgage crisis. In economics class, I learnt that it was the second greatest financial crisis after the great depression. As I'm writing this, the market is still dropping. In fact, the worse one day drop I saw just happened a few weeks ago with STI going down -127 points.

Credit: https://pixabay.com/en/crash-statistics-chart-graphic-bar-215512/

So what to do when the market is dropping now? Do you feel panic or do you feel its an opportunity? Let's explore this together.

Why is the market dropping now?  

By now, all of us would have known the reason for the market drop. China has devalued its currency and it has shook the financial markets worldwide. Other Asian currencies such as the Malaysian Ringgit, Indonesia Rupiah and even the Singapore Dollar went down as well. A drop in major currencies does signify an impending slowdown or even a crisis as seen during the 1997 Asian financial crisis. The Malaysian Ringgit is still on a downward spiral dropping to $3.07 Ringgit against $1 SGD now.


What To Do When The Stock Market Keeps Going Down?

Some of the stocks in our portfolio may already be losing money and this is quite common during a bear market. To say the truth, I do not feel any panic even when some of my stocks are in the red. In fact, I feel quite comfortable as of now. All along, I've been prepared for a stock market downturn as it has been talked about for the past 2 years. Finally we are starting to see some volatility. It is an opportunity for some but a fear for others.

I've only invested about 30%+ of my capital in the market as of now. I still have quite a lot of money to deploy during times of crisis. Investing during market downturns can be scary for a lot of people. Chances are that when we buy a stock, it will go down further. This is what happens during a bear market. As the market drops, low can definitely get lower. We may have to average down at least 3 times before the market starts to go up again.

Opportunities during a bear market

When investing during a bear market, we can get good companies at a significant discount. Some of the blue chips companies have already dropped more than 30% which makes them much more attractive than the beginning of this year.

Almost all the stocks look much more attractive than its previous highs but it is always the case that attractive can get more attractive. No one will be able to know how low the market can go so it is important to buy in tranches and allocate our investment capital efficiently.

For me, I would set aside money to buy stocks in at least 3 tranches. For example if  I set aside $6000 for a particular stock, I would buy in at $2000 each time. When to buy in for a stock has to depend on our investment objective. If we're investing for income, looking at dividend yields of 6% or more may be good for strong counters such as Capital Commercial Trust. We should look at the sustainability of the dividends as well and not just on the current dividend yields.

The market may drop further or will rise after that which nobody will know exactly how things will evolve. As investors, what we should do is to manage our risk well and invest consistently at better valuations. There is always opportunities when the stock market goes down. This is certainly what a lot of us have been waiting for.

Are you prepared to invest more during a bear market?

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Related Posts:
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The Power Of Dividend Investing [Part 2] - Choosing the right stocks for dividend investing

Dividend investing helps us create passive income so we can achieve financial independence. In my previous article, I wrote on the benefits of dividend investing and how we can essentially get more than 10% yield on our investment. You can read part 1 here: The Power Of Dividend Investing [Part 1]

Credit: Wikipedia

The question now would be, how do we pick the right dividend stocks for successful dividend investing? Let's take a look at some criterias for dividend investing in part 2 of this series. But before we get right into it, let me show you the pitfalls to avoid using the story of this once hot stock listed on the Singapore exchange.


Pick the wrong stocks and suffer

As with all investments, if we do it the wrong way, we would lose money. This is the same for dividend investing. Not only do we get lesser dividend if we pick the wrong stocks, some stocks will also cut out dividends totally.

Creative Technologies - The Once Hot Stock

One example of such a company which performed poorly over the years is Creative Technologies. You may remember the sound blaster sound card which used to be popular for PCs and the many breakthrough sound technologies which they have. However, in the end, Creative did not manage to keep up with the competition and the technology changes and fell behind over the years.

Let's take a look at its stock price from 1998 to now:

Image from Yahoo Finance (Click to enlarge)

Creative Technologies share price was once at a high of $59.50 in year 2000. The share price now is only $1.37 cents. This is a scary drop and those who bought it at a high would have got their fingers burnt badly.

As for dividends, Creative paid a stunning 50 cents dividend in 1998 which consist of a special dividend of 25 cents. In 1999, dividends paid was 25 cents. That was probably about 10% yield when its share price was about $20 before year 2000. What about the dividends now? Creative, although has a net loss reported year after year, still pays dividend to its share holders. Dividends paid is only 4 cents in 2014. That is a stark difference from the 25 cents and 50 cents dividends paid last time.

When choosing stocks to invest, we should not just look at dividend yield. Even with a 10% dividend yield, dividends could drop and we could lose money.

Choosing the right stocks for dividend investing

Each of us have our own different ways of choosing stocks. We also have our own different strategies for building our investment portfolio. Some may invest more into growth stocks, some practice value investing while others go into dividend investing. No matter what, there are always some basic criteria or check list which we can look at.

1. Look for Businesses with Strong Competitive Advantage

We always need to ask ourselves why is the firm suitable for investing? Are profits still coming in and if so is there a threat that competitors can steal away its customers?

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." -- Warren Buffett

When we invest in stocks, we have to think like a business owner. Investing in stocks is owning a part of a company. When we have this mindset, we would want to invest in a company that can probably survive as long as possible.

It is not easy to find stocks with competitive advantage. Some industries such as utilities and energy have greater competitive advantage as compared to industries such as F&B. Technology companies such as Creative could not create a strong enough competitive advantage to keep competition out. Once another company which has another breakthrough technology comes, Creative losses a big portion of its business and its profits slumped.

A business with strong competitive advantage can stay ahead of times and keep competition away. It is like the game of monopoly where the purpose is to dominate the entire market by buying as many properties as possible so your chances of getting money from other players is higher. If businesses can monopolise their market and keep competition out, then they have a greater competitive advantage.


2. Look for Undervalued Business

No matter how good a business is, we should not overpay for it.

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." -- Warren Buffett

Everyone loves discounts. If we can buy a great company at a discount, it is a good deal. During the 2008 financial crisis, stocks were trading at extremely attractive valuations. Many blue chip companies had a PE ratio of less than 10. PE ratio is the number of years needed for investors to get back their initial investment assuming all things remain constant.

We can use Price to Earnings Growth ratio (PEG) to determine if a company is undervalued or at fair value. This is mostly useful only for small companies. The formula for PEG is PE Ratio divided by compound annual growth rate. At the end of the calculation, if PEG is 1x, it means the stock is trading at fair value. If PEG is 0.5x, it is undervalued and we can say this stock has a margin of safety of 50% (less than 1 is undervalued). If PEG is 2x, it is a sell signal. Take note again that PEG is useful only for small growth companies.

Next, we can use the discounted earnings model or discounted cashflow model to calculate the intrinsic value. This is suitable for blue chips or mature companies. There is a free intrinsic value calculator which you can download from a fellow blogger's site here. There are instructions for you to follow there. If intrinsic value is $1 and stock price is trading at $0.50, this stock is said to be undervalued with a margin of safety of 50%. However, do note that blue chips companies normally trade at a fair price rather than a bargain price.

For companies which relies on its assets to generate income, such as REITS and property counters, we can look at it net asset value or price to book ratio to determine if the company is trading at a discount or otherwise. If a stock price is at $2 and its net asset value is at $4, then the company is deemed to be trading at a discount of 50%. This seems like a good buy at first glance. However, it is always not that simple as companies would include assets, such as development properties, as part of their assets. We should exclude the development properties and assume they are not sold. A company's assets will be further broken down under the notes to financial statement.

Below shows the balance sheet of Capitaland:

Click to enlarge

In the balance sheet, we can see current assets and non current assets. Development properties is listed under current assets which we may exclude. If we want to look deeper into the types of assets, for example under the property plant and equipment, we can go to note 3 as stated in the balance sheet. When we go to the notes to financial statement under point 3, we will see the below information:

Click to enlarge

The break down of Capitaland's property plant and equipment can be seen under the notes to financial statement. To analyse companies at a deeper level, it is essential to refer to the notes at the back of an annual report. 

If you're unsure of how to read financial statements, you can refer to my guide below:

• The Income Statement
• The Balance Sheet
• The Cash Flow Statement

3. Beware the temptation of high yields/dividends

When investing for income, we like to see good dividends which translates into high yields on our investment. Imagine if the yield is 10%, every $10,000 invested will give you $1000. It is really tempting to go for high yields. However, as investors who invest for income, even though high yields seems attractive, we should not jump straight into in.

Jumping straight into a high yield stock is like jumping into an ocean without knowing if its water is shark infested. It all seem good from the outside but if we look deeper, there may be dangers lurking ahead. A company which pay out high dividends have to get the money from somewhere. It can be paid from its income or it can be paid from its existing cash.

There are a few questions we need to ask ourselves when investing into stocks for passive income.

1. Where does the company pay its dividends from?
2. Are the dividends sustainable? Will the company continue to grow?
3. What's the trend of its past dividend payouts? Is it increasing or decreasing year by year?

Since we're investing for income, we want that income to be sustainable and even better if its increasing yearly. Look at the company's business structure for clues on where they derive its income. If income is not stable, most likely the high dividends are not sustainable as well. This is especially so for REITS where their income is derived from rental collected.

4. Understanding The Risks of a Company

Sometimes, companies can take on a huge amount of debt in order to expand the company and drive up profits. It is crucial to understand any risks which might come from taking on too much debt and keep track of how a company is performing by reviewing its financial results as and when available. A business with a strong competitive advantage can use debt to its advantage while a business which is cyclical in nature may succumb itself to danger when situation turns bad for them.  

Also, companies may have a high dividend payout ratio to attract investors when they just started out but this dividend may not be sustainable. A lower dividend payout ratio is generally preferred as these companies can still raise its dividends even if its profits drop later. On the other hand, a company which has a high dividend payout ratio will suffer cut in its dividends when profits drop. However, this will not apply for REITS which have to payout 90% of its net income after tax to shareholders. 

I hope the 2 part series on dividend investing has given you some insights on how it is possible to generate passive income through it and also the strategies in selecting dividend stocks. Market has been volatile recently. Dividend investing is still a better choice as we shareholders get dividends even during a bear market. Nevertheless, do invest safely in the right stocks!

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The Power Of Dividend Investing [Part 1]

There have been a number of emails from readers asking me how to calculate or get a decent dividend yield from investing in stocks. I've always subscribed to the idea that creating passive income is important in our lives if we want to achieve financial independence. We could then keep all our earned income and spend on our passive income to be self sufficient.

Investing for income or dividend investing is a good way to create passive income. This method has worked for many people just like how it has worked for me so far. Having extra money coming into our bank account every now and then is not a bad idea at all. I've always had the habit of transferring a portion of my salary to my other bank accounts. I make this process automatic so it is effortless on my part. Then, I can spend the rest of the money left in that one account.


Transferring out my salary but still have more money

I transfer a big part of my salary out from my bank account every month right after my salary comes in. When I do this, magic starts to happen to this account. At first, the money in that bank account seems to be decreasing but as time passes, the money in that account grew even though the automatic transfers were still happening. This was the result of creating passive income.

This was essentially what I did:

You can replace the overseas holiday with any other expenses which you might have. After transferring a big portion of my money out every single month, my account still grew to the point that I could now afford an overseas holiday to Japan, Europe or even the US without saving up.


If you want to enjoy,  go create it!

Too many people are just spending all their earned income in order to enjoy life. If we do that consistently, we will be broke all our lives. If you want to enjoy, go create it instead. By creating, I don't mean trying to earn more active income again. It is important to grow our active income and increase it but there will always be a limit on it.

If you can earn more active income but still have the time for other more important things in your life, go ahead and do it. If you take on an additional part time job on top of your full time job, sacrificing away your family time, it doesn't seem like a wise choice. Dividend investing for passive income can help us have more money and at the same time have more time.


The Power of dividend investing 

Dividend investing is a powerful concept. Most of us know Warren Buffett as a value investor but he is actually also a dividend investor as well, or we should say a dividend growth investor.

Warren Buffett's top 5 holdings are:

• Wells Fargo
• Coca-Cola
• American Express
• IBM
• Wal-Mart

All of the five stocks above pays dividends. Wal-Mart has paid increasing dividends for over 40 years. Coca-Cola has paid increasing dividends for over 50 years. Stocks that increases dividends for the long term is a good choice for a dividend investor. Moreover, a company that can increase dividends may mean its profits increases as well which leads to stock price increasing. Dividend and growth sometimes do go hand in hand. 

Singapore Stocks for dividend investing

Some of us are not too familiar with the US market so let's start with the Singapore stock market. Are there companies which has paid increasing dividends over the years?

Yes there is. Let's look at some Singapore stocks and how it will turn out if we had invested in it over the years.

Starhub

Starhub is one of the 3 telecommunication companies in Singapore. Its no doubt a dividend stock paying dividends to shareholders every quarter. In 2005, Starhub paid a total of 6.5cents in dividend. Fast forward to 2014, Starhub has increased dividends to 20cents for the whole of 2014. 

In 2005, Starhub's share price was trading at just $1.30. Today, the price is at $4.05.  If we had invested in Starhub back in 2005 and hold it all the way to now, we would be getting a dividend yield of 15.4% (based on a price of $1.30) and also the value of the stock price has increased by 3 times. $5000 invested in 2005 would become about $15000 now and we would still be getting about $800 dividends annually from the initial $5000 invested.  

Sembcorp Industries

Sembcorp industries is an energy, water and marine group. It has paid dividends every single year for the past 16 years. In year 2000, it paid total dividends of only 10 cents while today, it is paying dividends of 22 cents in 2014. Stock price was trading at around $1.70 in year 2000 and has increased to a high of $5.50 in 2014. 

$5000 invested in Sembcorp industries would have grown to $16000 in 2014. We would also be getting an annual dividend yield of 12.9% base on the price of $1.70 bought in year 2000. 

Jardine C&C

The most amazing dividend investing story would be from this company. Jardine C&C is a well know stock among investors especially for its high price of $36 now. At its peak, the price was more than $50. Jardine Cycle & Carriage engages in motor vehicle retail, distribution, and after-sales service.

This company has paid dividends for the past 23 years. In 1993, total dividends paid was 10 cents. Today, in 2014, total dividends paid add up to $1.08 in total. This is more than 10 times increase in its dividend payout. Stock price was trading at $3.80 in year 2000 (I only have the data from 2000 onwards). Today, price is at $36. Dividends has increased 10 times while stock price has increased about 10 times too. 

$5000 invested in Jardine C&C would have grown to $50,000 now and we still get about $1300 in dividends annually. This is a 28% dividend yield on the initial invested capital. 

Parkwaylife REIT

Parkwaylife REIT is a real estate investment trust which owns hospitals such as Mount Elizabeth and Gleneagles. It has paid dividends for the past 7 years with dividends at 7.4 cents in 2009 growing to 11.4 cents now.  Its stock price was trading at $0.76 in 2009 and $2.31 now. 

If we had invested from 2009 till now, we would be getting an annual dividend yield of 15% based on the purchase price of $0.76. 

Dividend yield of more than 10%

From the above examples, we would be getting more than 10% or even 20% dividend yield if we had bought and kept those dividend stocks for the long term. However, not all stocks have increasing dividends and increasing stock price. There are many stocks which performed poorly over the years with decreasing dividends or even cutting dividends off completely. Share price would also drop as a result. 

The challenge would be to research and find the stocks which have the potential for long term dividend play. In the next part of this post on the power of dividend investing, we'll look into some of the selection criteria which we can possibly use and the strategies to build a dividend portfolio.

Read Part 2 here: http://sgyounginvestment.blogspot.sg/2015/07/the-power-of-dividend-investing-part-2.html

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Lippo Malls Indonesia Retail Trust - Is 8.1% Yield A Good Investment?

A reader emailed me asking about Lippo Malls Indonesia Retail Trust. Is it a good time to buy now? Base on FY2014 DPU, the yield works out to be 8.1% at the price of 0.34. The yield is definitely quite high and seems like an attractive investment. I got interested in it and took a good look at the company's financial statement. I'll share with you my findings below.

Introduction to Lippo Malls Indonesia Retail Trust

Before I dive deeper into the financial analysis of the company, here's a short introduction of the company. Lippo Malls Indonesia Retail Trust owns 16 retail malls in Indonesia with 6 of them in the capital city, Jakarta. I went to Jakarta in December 2014 and visited a few of these malls during my trip. I took pictures of this particular mall located at the North of Jakarta near to the coastline.

It was Christmas time and they were having some Christmas events there. The malls of Lippo Mall are like the suburban malls we have in Singapore. They cater to mostly the middle class population in Indonesia.


Is it a good time to buy?

Net Property Income and Distribution Per Unit (DPU)

The net property income in 2014 decreased by 12.1% as compared to 2013. The DPU for 2014 decreased by 15.1% as compared to 2013. This makes the annualised distribution at 8.1% base on the price of 34 cents. In constant currency terms, net property income only decreased 1.2%. The currency depreciation of the Rupiah has affected the DPU by quite a significant amount. If Rupiah continues to weaken, then DPU may continue to get affected in the next few quarters.

Concern of loans maturity

Looking at its loans, most of it will expire by 2017. The closest one will expire in July 2014. This is $200 Million of the total $630 Million loan which is quite a significant amount. Once this loan expires, they will have to refinance it and probably will face higher interest rates in July. This is not a good sign for that $200 Million loan. If they can't refinance, they will have to find other ways to raise funds such as issuing rights which will dilute current shareholder's value.

Another scenario is they could pay back the loans in cash but it would reduce its assets by a large proportion. However, LMIR's current assets as at 31st December 2014 is only $171.6 Million. Cash and cash equivalents stand at $103.92 Million. It is not enough to repay the $200 Million loan so some form of refinancing or equity raising is expected when the time comes.

One thing to note is that on 18 December 2014, LMIR was granted $180 Million term loan facility with interest rates at 3% + SGD Swap Offer Rate (SOR). This loan is on variable interest rates and will be subjected to interest rates movement. As we know, interest rates have started to increase and this has affected LMIR's DPU and will continue to affect DPU when interest rates continue climbing.


Conclusion

Even though this stock is currently trading at a discount to its NAV of 42.4 cents, I expect NAV to decrease and DPU to decrease further also. This is in view of the currency risk and interest rate risk, This may cause a drop in the stock price if it happens.

If we want to invest in this company for income, we must ask ourselves is the Rupiah going to be stronger or weaker and will they have a lower or higher interest rate when they refinance their loans up to 2017? For now, I'll be staying on the sideline before I decide to invest in this company. Not vested at the moment.

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Your Love Relationship and The Stock Market

Do you remember the last time you fell in love with someone you like? What were the emotions you experienced? You would probably feel excited but at the same time tensed. You may even feel happy but at the same time think how can this be real? Some people say relationships are only exciting during the so called honeymoon period and  becomes less exciting and more comfortable after some time. So how do all these relates to our journey investing in the stock market?

The stock market is full of emotions. It is more complicated than a love relationship between 2 person and even more complicated than a love triangle situation. The stock market is made up of emotions of hundreds of thousands and even millions of people. How does it look like in a chart?

Credits: myenticingjourney.wordpress.com

There are so much emotions as you can see from the chart above. Its like an emotional roller coaster ride. Every investor will go through the stages of excitement, thrill, fear, panic, hope and optimism. Let's take a look at the stages a new investor would probably go through:


1. Excitement

Credit: www.flickr.com

Most new investors who want to start investing would start with excitement. Its like they really fall in love with the stock market. Out of the people I met so far, I've never seen anyone who starts investing without feeling excited. However, when there is excitement, most would forget that they need to be logical as well. This happens in a love relationship as well. It seems like when we fall in love, we forget all about our brains.


2. Thrill

This is the so called honeymoon period in a relationship. The thrill to meet one another everyday. The thrill to talk to one another everyday. This emotion is much more exciting than the excitement phase. For investing, new investors get the thrill when they make some money from the stocks they buy. The stocks start to go up and they see their portfolio increase from $100 profit to $1000 profit to $10,000 profit. This is the thrill which is very real.


3. Fear

Credit: http://commons.wikimedia.org/wiki/File:Scared_Child_at_Nighttime.jpg

Thrill and excitement dies off after awhile for most of the events in our lives. The dream job which you thought would last you for the next 10 years becomes boring after just 1 year. The excitement and thrill of owning that new gadget dies off after awhile. The thrill of a new relationship becomes more comfortable and mundane after sometime when you realise that your partner may not be that perfect. This is the real test for us. For investing, the stocks you bought is losing money. It does not seem as perfect as what you imagined it to be. Now you might be thinking, should I sell or should I average down and buy more? It is very hard to make a decision when you have fear.


4. Panic

After fear comes panic where we make rash decisions. For love relationships, we may end up quarrelling and breaking up. There are lots of hurts involved when we make panic decisions. For investing, we lose so much money that we just sell the stocks away, not thinking whether is it the right thing to do?

In relationships, you'll realise that there are no perfect people out there. In investing, you'll realise that there are no guaranteed money making stocks out there. This is the stage where we really need to calm ourselves down and think carefully on why we started the relationship or invested in that stock in the first place? The partner you chose to be with may not be that perfect now but he or she is probably the same person whom you first knew. The stocks which you bought may be going down a lot in price but it may still be the same company which you know is strong. The fundamentals may still be good.

If you calm yourself down now and make the right decisions, you may realise that the partner you have is still good and you can invest more time and fall in love all over again. If you think that the stocks you bought seems to be still fundamentally stable, you can invest more and average down the price.

On the other hand, if you've thought about it carefully and think that the situation is different from the first time you encountered, then you should cut loss and move on. This applies for both relationships and investing in the stock market.


5. Hope and Optimism

If you've made the right decisions in point 4 above, then hope and optimism comes into your life. Your relationship with your partner becomes stronger now as you put in more effort for it. The investments you average down is going back up and you start seeing profits.

Credit: www.flickr.com

There are also times when we have to cut loss for our investments. If we know we invested for the wrong reasons in the first place or we are not sure why we invested in that particular stock, cutting loss will let us have a new beginning with clearer direction for our portfolio.

For relationships, sometimes a break up may be inevitable if both are really not compatible. In this case, its better to move on where there will always be hope for a better future.

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Make Money Investing For Passive Income

One of the easiest way to generate additional income for yourself is to invest in the stock market. Depending on how much time you spent researching and analysing the stocks of companies, it could be passive or active income. To me, it's still considered passive income as I only have to research on the stocks once and review it every quarterly when the financial results are released. Sometimes there may be other announcements in between but those don't really take up too much of my time.

Most people invest in stocks to sell it off at a higher price and earn a profit. However, there are some other people who invest in stocks for income. This is a slow way to grow wealth but has worked well for many people. Another way to invest for passive income is to buy a property and rent it out. In this way, you receive a monthly income from the rental collected. However, the problem is buying a property is expensive especially in Singapore. If we were to buy a private condominium, the down payment is already 20% which means it could be $200,000 for a $1 Million dollars condominium. How many of us actually have that kind of cash to begin with?

Investing in stocks seems to be a more practical way for a start. So how do we go about investing for passive income?


Beware the temptation of high yields/dividends

When investing for income, we like to see good dividends which translates into high yields on our investment. Imagine if the yield is 10%, every $10,000 invested will give you $1000. It is really tempting to go for high yields. However, as investors who invest for income, even though high yields seems attractive, we should not jump straight into in.

Jumping straight into a high yield stock is like jumping into an ocean without knowing if its water is shark infested. It all seem good from the outside but if we look deeper, there may be dangers lurking ahead. A company which pay out high dividends have to get the money from somewhere. It can be paid from its income or it can be paid from its existing cash.

There are a few questions we need to ask ourselves when investing into stocks for passive income.

1. Where does the company pay its dividends from?
2. Are the dividends sustainable? Will the company continue to grow?
3. What's the trend of its past dividend payouts? Is it increasing or decreasing year by year?

Since we're investing for income, we want that income to be sustainable and even better if its increasing yearly. Look at the company's business structure for clues on where they derive its income. If income is not stable, most likely the high dividends are not sustainable as well. This is especially so for REITS where their income is derived from rental collected.


Be a lazy landlord by investing into REITS

A REIT, also known as a real estate investment trust, has a portfolio of properties which they rent out to collect income. Buying a share of the REIT makes you a shareholder of the many properties that it has. For example, if you buy the shares of Capitamall or Suntec, then you actually become a shareholder and own part of the shopping malls you see at City Hall, Tampines, Jurong, Woodlands and many other parts of Singapore. Some of these Reits have properties in other parts of the world too.

The rental collected is distributed to all the many other shareholders and each will receive a portion of the income according to the number of shares they own. Reits listed in Singapore typically pay a range of 5-8% in dividends. If dividend remains constant, the lower the price you buy a share of the Reit for, the higher the expected dividend yield will be. The best thing is you don't have to manage the property to get the rental. The Reit manages it for you.

Reits own assets which are mostly properties. If we can buy a Reit at its fair value to its asset or better still at a lower value than its asset, then it may be a good investment. Think of it this way. When you're buying a house in this particular estate and you realise the house is selling at 20% cheaper than the neighbour who stays beside you, is it a good deal? Of course its a good deal which should be kept secret from your neighbour when you move in. This is buying at a lower value to its asset.

Therefore, buying a Reit below its asset value is much better than buying above its asset value. If we buy below its asset value, we're buying it at a discount. The net asset shows the total assets a Reit has. Divide this amount by the number of common shares, we get the net asset value (NAV) per share. If a Reit's NAV per share is $1 and we buy it at 50cents, we're buying it at a 50% discount. This NAV figure is mostly provided by the company in its annual report.


Watch debt like a hawk

Debt is a powerful force. We can use debt to buy a penthouse at Sentosa cove and everyone will think you're rich. But in actual fact, you do not have the actual money to own it. Reits also use debt to buy some of their properties. It may not be a bad thing as long as they don't stay it it or leave it vacant. It has to be rented out to other people so they can collect rental every month.

Renting out your Sentosa cove apartment may make you a lot of money but the problem comes when you can't find any tenants to rent it out to. Without tenants, you lose your income and still have to pay the debt (monthly housing loan) every month. If you still can't find tenants and you don't have money any more, you'll be in deep trouble. This is similar for Reits. If they can't find tenants and their debt is very high and they don't have much cash, it'll be like a bomb just waiting to explode.


Passive income for financial independence

In our early days of investing, the dividends received should be reinvested to let your money compound over the years. Once your dividend income (passive income) surpasses your monthly expenses, you've reach financial independence. If you're still working, you can now save 100% of your take home pay and just spend using the passive income. Now, you can choose to work or not to work. Now, you can choose to do the stuffs you're passionate about.

Investing for passive income can make you money for as long as you live. If you buy a property and rent out over the years, you would have got back all your capital after some time and still be able to collect rent as long as there are tenants. If you invest in shares of companies, you also get back all your capital after some time and this company still continues to pay you as long as its still around and listed on the stock exchange. A slow way to grow money but this patience will definitely pay off after a period of time.

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