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.
Enjoyed my articles?
You can Subscribe to SG Young Investment by Email
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.
Enjoyed my articles?
You can Subscribe to SG Young Investment by Email
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