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Willie Keng, CFA

Willie Keng, CFA

Chief Editor

How to Pick the Best Dividend Stocks in Singapore

Before sinking your money into stocks, check out these simple steps will help you pick some of the best dividend stocks while avoiding the risky companies from your portfolio.
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How would you like to create a dividend growth portfolio that pays you S$10,000, S$50,000 or even S$100,000 in passive in come year after year. Through your retirement in Singapore, and even during a crisis?

Well, here’s the thing. The first thing you need to know is learn how to pick high-quality dividend stocks. It can be in Singapore, or even other stock markets in the US, Malaysia or Hong Kong. 

The formula to pick the best dividend stocks remain pretty much the same. 

Here’s 5 quick ways to get you started picking the best dividend stocks (and it’s not just looking at the yield). And if you do it right, dividend growth investing is truly the greatest, and more rewarding investment strategy in the world!

Onward.

 

Content

1. Check for growing sales and earnings in dividend stocks
2. Have a consistent track record of dividend raises
3. Dividend payout ratio is less than 70%
4. Have a durable competitive advantage
5. Not all high dividend yield is good

 

1. Check for growing sales and earnings in dividend stocks

This is the first thing you want to pay attention to. 

When you’re picking the best dividend growers, you want to find solid businesses which can grow their sales and earnings year after year. Why? 

This shows there are signs the company has a good competitive advantage. 

You see, growing sales means there’s big demand for a business’s product and services. While growing earnings show the company has a resilient business model. 

Now, you don’t want to pick businesses that grows their sales too aggressively, yet they have been making losses year after year. When the company is not making money, there’s no way the company can reward shareholders (that’s you).

 

2. Have a consistent track record of dividend raises

Next, the dividend stock (obviously) must have a long history of raising their dividends. 

You see, if a company can pay you rising dividends year after year, it’s a hallmark of financial excellence. 

It tells you that its business is profitable to reward shareholders in the long run. 

What you want is to track at least 10 years of successive dividend raises. 

Why 10 years? Well, it’s simply a safe way to tell me that the company is consistent in increasing their dividends. . 

Let me explain. 

You see, in my opinion, having a long track record gives you a better prediction if the company can continue to raise its dividends over the next 5, 10 or even 20 years. This also shows the company’s reputation as a high-quality dividend stock.

Let me show you how you can quickly check this.

Let’s look at OCBC Ltd (SGX:O39) below.

Source: www.morningstar.com

Let me explain here. Johnson & Johnson has not only paid dividend to its shareholder over the past 10 years, but it has successfully raised its dividends year after year. 

Let’s look at the period between 2010 to 2019.

If you’d owned a share of Johnson & Johnson in 2011, you’d get dividends of $0.29 per share for 2011. 

And if you’d continued to hold the stock till 2019, you’d collect $2.25 of dividends in 2011, $2.40 in 2012, and so on. In 2019, your dividends collected for that year would be $3.75 per share. 

That’s $28.80 of dividends paid to you over the 10 years. 

Well, imagine if you’d owned 100 shares of Johnson & Johnson — that’s US$2,880 of dividends paid to you.

If you’d owned 200 shares, that’s US$5,760 of dividends paid to you. 

Think about it. If you’d invested another 9 more stocks paying you the dividends Johnson & Johnson is paying you…

3. Dividend Payout Ratio is Less Than 70%

This is a valuable tool here. When you look at companies which pays dividends, you want to make sure it does not pay out more dividends than what it is earning.

A quick way is to use the dividend payout ratio to find out.

Dividend Payout Ratio is the percentage of dividends a company pays out from its yearly earnings.

It looks something like this.

If the ratio exceeds 70%, the company may not reinvest enough earnings into the business. 

An exception is a REIT, as it pays out most of its earnings as dividends. This is to reduce corporate income tax. 

Let’s look at JNJ again.

You can see its dividend payout ratio is reasonably between 44% to 70% over the past 10 years.

If the ratio exceeds 70%, the company may not reinvest enough earnings into the business. 

An exception is a REIT, as it pays out most of its earnings as dividends. This is to reduce corporate income tax. 

Let’s look at JNJ again.

You can see its dividend payout ratio is reasonably between 44% to 70% over the past 10 years.

It’s as simple as that.

 

4. Company Has a Durable Competitive Advantage

It’s as simple as that.

 

#4: Have durable competitive advantage

 

This is one key feature all successful dividend companies must have — a business with a durable competitive advantage.

What we're trying to do... is to find a business with a wide and long-lasting moat around it, protecting a terrific economic castle with an honest loard in charge of the castle.

Warren Buffett
berkshire hathaway ANNUAL SHAREHOLDERS' meeting 1995

 

The company you pick could be a lowest-cost producer in some regions, or have very strong branding, or simply sell products or services that customers find it hard to switch.

 

#5: Dividend Yield Around 1 – 3%

 

Dividend yield is the company’s annual dividends per share dividend by its share price. 

 

Of course, a high dividend yield will get your greed glands going. When you’re picking dividend growers, you want dividend yield to be around 1% to 3%. Why so low?

 

A high dividend yield stock could mean that the business is in trouble, that’s why the stock is trading at a low share price (causing the yield to go up) — aka Value Trap.

 

Don’t worry about the low yield. If you’d pick the best dividend growers, your dividend yield will increase over time. 

 

Think about it. 

 

Let’s say you’d bought a stock with a dividend yield of 2%. The company grows over time and it doubled its dividends over the next few years (which is highly possible). 

 

Your dividend yield on the stock would have easily doubled to 4%. And let’s not forget that the stock price can go up too.

 

There you have it. 

 

This is 5 quick ways to successfully pick your dividend growers to invest.

 

Of course, it’s not just about looking at dividend yield alone.

 

I hope this little cheat sheet helps you along the way.

 

Chat soon…

 

Willie Keng, CFA

Willie Keng, CFA is the founder of Dividend Titan, a financial publication for self-managed investors. A former research analyst for top private banks, Willie today runs his own consulting firm. Some of his clients include asset managers and family offices. Willie has a deep passion for helping everyday investors take control of their financial future. And has spent over 10,000 hours researching, analyzing and recommending investment ideas.

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