THIS ARTICLE WAS WRITTEN BY TAY JUN HAO AND FIRST PUBLISHED ON THE ASIA REPORT
“The risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities.
Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favourable business conditions.
– Benjamin Graham
Many investors who take fundamentals based approach to investing like to look dividends. And that’s generally a good starting point if you’re new.
A long and good consistent dividend track record is important as serves an indicator that management is both disciplined in allocating capital, and respects the interests of minority shareholders.
However, one trend which I’ve come to notice is that far too much attention is paid to the current dividend yield.
This is even truer today when investors around the world are starved for yield.
Before we look at stocks specifically, let us consider how investors make money from investing in property.
You can have the capital gains appreciation, and the rental income.
While rental income provides a steady flow of income, the role of capital appreciation cannot be understated. When purchased at a reasonable price, investors can expect the value of their properties to keep up inflation.
Over the long run this adds up.
Now, when investing in shares, investors mainly derive their earnings (and losses) both from capital gains and dividends.
Academic studies have shown that a large part of returns derived from equities are due from dividends.
So what investors need to do is to take a step back and consider the bigger picture.
Dividends can only be paid consistently if a company has a business model that produces stable cash flows over long periods of time.
Certain businesses like Food & Beverage Outlets (Old Chang Kee), Telecommunications (Starhub, Singtel) are more likely to have such models… as opposed to highly disruptive industries like the mobile phone industry.
One other way is to look for businesses with “moats” or “competitive advantages”, such as Microsoft, Colgate, Pepsi, Coca-Cola.
The key thing is that investors cannot jump the gun and just look just at dividend yields to assess whether a company is worth investing in. Investors need to consider whether the business itself has a chance of sustaining that dividend payout in the long run.
If not, investors are likely to face significant capital gain losses when dividends are cut or slashes during times of economic difficulty.
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All views and opinions articulated in the article were expressed in Jun Hao’s personal capacity and do not in any way represent those of his employer and other related entities. Jun Hao does not own any shares in the companies mentioned above.