In an earlier post where Mr Salty gave an overview of the jargons used in stock trading, he mentioned that there are people who invest in stocks for the dividends.
This post will serve to answer the question of how one can unlock the power of dividends and under what circumstances will the “power” of dividends be multiplied.
What is Dividend
Dividend is a sum of money a company pays to its shareholders every year, if they are making profits. Usually, a company will pay a dividend of about 2% – 3% of the prevailing share price every year. When a person invests in the company, their money will “grow” 2% – 3%, which is better than the bank’s interest rates and keeps up with the inflation rate. Therefore, there are people who invest in stocks to “preserve” the value of their money, via earning dividends.
Ex-Date, Record Date and Payment Date
Avoiding all technicalities, basically everyone who is holding on to a company’s shares on and before the Ex-Date (also known as XD – no, Mr Salty is not laughing with an emoji) will be eligible for receiving the dividends.
Record Date is just a technical term not relevant to a shareholder.
If a shareholder holds a share on Ex-Date, then he will receive the dividend on Payment Date.
Where to Check for Information on Dividends?
The most authoritative resource for checking information on dividends is on SGX’s website. First, one will have to go their Price Screener page.
https://www.sgx.com/securities/securities-prices
From there, search for a particular stock using their search bar.
Once you’re at the company’s stock information page, scroll to the section underneath the chart and click on “Valuation” tab. The “Dividend Yield” field tells us, based on historical data, how much dividend a company pays a year, as a percentage of the share price.
For example, if a company pays $0.50 per share in a year, and its share price is $15, then the dividend yield is 3%.
Alternatively, one can go to the “Dividend” tab to look at the historical details of the dividends. When did they pay their dividends? How much did they pay each time?
Mr Salty usually uses this to decide on several things:
If a company announces a dividend equivalent to 3% of share price, the share price will usually rise 3% after the announcement and up until XD. If one buys a share during this period, he may earn that 3%, but he will immediately lose that 3% after XD. Therefore, Mr Salty will usually put off buying a share during this period.
At the same time, Mr Salty does not want his money to sit in the company without doing anything. So if the XD is usually in December and Mr Salty is in March, he will mark off his calendar to relook at the stock at around August. And if he decides that the stock is worth buying, he will buy the stock before the announcement date.
Mr Salty will look at the dividend history and recent financial reviews about a company’s “health”. If a company consistently paid more than X% of dividends for the past few years and reviews said that the company is in a good condition and will likely pay X% dividend for the coming years, then Mr Salty will buy the share before they announce their dividends. In a sense, Mr Salty is betting on the future of the company. However, he is also reducing the risks by doing his due diligence.
When Will the Effects of Dividends be Multiplied?
Usually, companies that issue dividends are so stable that their share prices barely move over a few years. However, in times like the recession of 2008, Japan Tsunami of 2011 and Covid-19 pandemic of 2020, the share prices of all these companies will drop. Take the most recent Covid-19 pandemic for example, Singapore Airlines’ share price dropped 30% to $6, DBS dropped 27% to $19 and ST Engineering dropped 25% to $3.
The 3 examples above are companies that “will not fail” and hence their share prices will eventually return to pre-pandemic levels in the next few years^.
^There have been exceptions. For example, Singapore Airline’s share price never recovered to its all time high of $19 after the 2008 recession. However, historically, the price still recovered from the lows of 9/11 ($8.55 to $14), SARS ($8.79 to $19.20) and 2008 recession ($10 to $14.18).
Take the example of ST Engineering, with a reported dividend yield of 4.4%. If we buy 10 lots at a current price of $3.10, we will spend $3,100. If we assume the share price will return to about $4 (not going to expect it to return to its pre-pandemic high) and that the dividend yield remains the same at 4.4%, they will pay a dividend of $176 for the 10 lots of shares we own.
Compared to the initial investment of $3,100, that comes up to about 5.6%. And as long as the share price remains above $4 and dividend yield maintains at 4.4% (both of which are likely, considering that ST Engineering is a blue chip company), it would mean the $3,100 we invested in will continue to grow at 5.6%, which beats Singapore’s inflation rate and is far better than any bank’s interest rate.
Philosophy on Dividend Stock Trading
While it is possible to multiply the effects of dividends by making use of market lows, such chances come only once every few years.
When people buy stocks to earn dividends, they are only seeking reassurance that their money is better off in the stock they bought, rather than leaving them in banks.
In fact, dividend stock investors will only buy a share after they had read up on the company and are satisfied that the company will be able to bring in profits consistently over the next few years. They will buy into a company’s share without expecting to sell them. If you read about Mr Salty’s earlier post about understanding profits from stock trading, the act of selling stocks “incur costs”, so if there’s no selling involved, the cost related to selling is equal to zero, and hence, maximises the return of the stocks.
It doesn’t mean that dividend stock investors never sell the stocks they own. They still review their portfolio every year to determine the health of a company. If a company is expected to hit some rocks in the next few years (think about the fallout and recovery from Covid-19), then the investor will still sell the stock. However, the dividends earned from years of holding on to a stock will more than cover the cost of selling it.
Parting Words
Mr Salty’s approach to stock investment based on dividends is considered conservative. However, if we buy into a stock at the right time, like in the current low due to the pandemic, there is still a chance to maximise returns using a conservative approach.
One reason why Mr Salty prefers buying stocks for dividends lies in the fundamental fact that he can sleep well every night. In fact, he just buys a stock and only looks at it during a yearly review.
If Mr Salty’s explanation of the approach to investing based on dividend helped you understand the concept better, do remember to Like this post and Share it with your friends! Follow this blog for more investment explainer to newbies to stock trading.
Remember, salty is life!