How I Invest for Dividends (as a Singapore Investor)

I thought it’s interesting to share with my readers who want to learn how to build a dividend growth portfolio from scratch.

I’ve been investing for the last 13+ years. In 2018, I quit my corporate job to invest full-time. I currently invest for my family and close friends. 

Last year, I’ve started a smaller portfolio (to scratch my “itchy backside”) dedicated to a dividend growth strategy. 

Btw, I use Interactive Brokers to invest this portfolio.

This is a work in progress. But I thought it’s interesting to share with my DT readers who want to learn how to build a dividend growth portfolio from scratch – regardless of whether the market goes up, or down.

Now, the 1-year mark is an important milestone. At this point, you’ll know whether an investing strategy suits you. If it doesn’t work or suit you, change. Next, investing for a year, you can better gauge whether your guts can take any volatile stock price movement — or experts like to call “risk tolerance”.

By the way, I’m not a licensed financial advisor. What I’m sharing is for my own personal learning and nothing here should be taken as professional investment advice. As an ex-analyst, I’ll tell you ANY past performance isn’t a guarantee of future performance. Please do your own due diligence. 

Going forward, I’ll share my updates and results with my DT readers

Source: My IBKR account

So far, this portfolio has returned 20% since last year. When I started this portfolio in early 2023, the stock market wasn’t going anywhere. What’s worse, there was a bear market in October 2023. At that point, my portfolio performance was down 8%.

But I thought it was a good time to be buying more. As you’ll see, I added more capital toward the end of 2023 into the portfolio.

Early on, I bought stocks that were heavily sold off because of the market’s fear in higher interest rates. I added stocks like Adobe and Domino’s Pizza. Both were down over 40% from their peak in 2022. I also added businesses that had exposure to China. This was a perfect case of the stock market throwing babies out with the bath water.

Dividend growth investing is looking at sheer, outrageous value.

Then accumulating as many shares as possible at sensible prices.

My Right Price Limit

Like an engineer building a bridge, my stock picks are based on the concept of a margin of safety. I calculate my own margin of safety by assessing a company’s intrinsic value and determine my Right Price Limit.

I’ve used my personal stock watchlist (which I share with Diligence members) as a starting point to buy stocks. It’s my treasure trove of potential stock ideas to actively buy when the price is right. Here’s how I look at it:

  • If current stock prices << My Right Limit, I accumulate more shares
  • If current stock prices >> My Right Price Limit, I stop accumulating shares

The lower the current stock price is from My Right Price Limit, the bigger the discount from intrinsic value, the more aggressive I accumulate in a stock.

In a way, My Right Price Limit is also a personal reminder not to overpay for any businesses. 

Source: Diligence membership

Intrinsic Value

I calculate my own intrinsic value to figure how much a business is worth. I use a discounted cash flow (DCF) model, which projects the sum of all its future free cash flow a company can potentially make over its life time.

Then I assign a value. 

Sometimes, I use market multiples like P/E, P/B and historical dividend yield to support my intrinsic value calculations. What’s important is to know a company’s value before I put a dollar into that business. 

My Dividend Growth Investing Strategy

My strategy isn’t complex. I try to buy durable businesses with a competitive advantage – at a sensible price. The starting point is it must grow, or at least pay dividends. It also must have a reputable management.

Note: It’s important that dividends aren’t just buying high yield stocks. Instead, I focus on both dividend growth AND growing my portfolio’s capital. The dividend yield might look small at the start, but I expect the yield to grow over time.

So, what’s my weapon of choice? Good research. Because this allows me to pick up companies that could look at roadkill – highly unpopular by the stock market.

Why Dividend Growth Investing? 

Crypto-bros would laugh at me buying a stock that pays 2%, or 3% dividend yield. But over the years, the more I think about it, the more I believe we should care a lot more about dividends. When a company establishes a durable competitive advantage over its peers, it often starts paying out regular, rising dividends.

Put it this way, a great company first has to show it has predictable, long-term earnings in order to sustain these dividends. And this predictability matters more to the market than just short-term, massive earnings growth. Because this is what leads to increases in stock price valuation.

On the other hand, weak companies with shaky business models, unreliable earnings and vulnerable to disruptions cannot sustain their dividends – or even pay one. In this case, such companies over the long run be given a lower stock market valuation.

Charlie Munger once said: “We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year.”

It’s that ability to write that check, which reflects business excellence. And this ultimately, drives massive shareholders’ returns.

The thing is, finding dividend growers and payers narrow my focus to picking stocks. This makes finding hidden gems easier — and faster. Dividend investing helps to reduce the probability of “unforced error”, or losing investments. Now, going purely for growth stocks help to maximize the returns. But over the long term, it doesn’t necessarily mean consistent, compounded returns.

Pat Dorsey, founder of Dorsey Asset Management, said paying dividends doesn’t mean the company admits defeat. It’s actually putting a flag to say says it’s victorious. That the company IS growing. Of course, dividend companies aren’t good if it’s largely funded by debt.

Over the last 90 years, the best stock performers are stocks that are either dividend growers or dividend payers. And dividends have contributed close to 40% of total returns in the stock market. In fact, dividend growth stocks have outperformed the stock market over the last 30 years with a much lesser “volatility”. 

It’s interesting to note, dividend growers, initiators and payers produced the highest average returns in the stock market over time.

By choosing to compound my portfolio with income, I try not to care exactly where the stock market is tomorrow, or even the next month.

This way, I spend most of my time reading management letters, assessing financial statements, thinking about a business’ true intrinsic value and figuring out business models and industries. 

Monthly Statement Table

I track 3 things in my monthly statements:

  1. Portfolio Value (NAV)
  2. Monthly Dividends
  3. Projected Annual Dividends

I started deploying money from June 2023. First dividend paid was in August 2023. 

Source: My IBKR account

Over the past year, my dividends have steadily accumulate. I reinvest it back to drive growth.

Source: My IBKR account

My Projected Dividend Income for 2024: $1,072.

While this is a small amount, I expect my projected dividend income to compound over time. 

Source: My IBKR account

Different stock markets pay dividends differently.

  • US stocks typically pay quarterly distributions
  • Hong Kong stocks pay half-yearly or yearly
  • Singapore REITs pay quarterly
  • Singapore stocks: half-yearly, or yearly

If you’re using dividends for your expenses, it’s a good idea to plan your expenses, knowing when this dividend income will come in.

However, if you don’t need the dividends today and can afford to reinvest your income, then it’s good to keep track of your accumulated
dividends.

Benchmark

For now, I use the SPY index as a benchmark. Over the long-run, I may not do as well as the broader market. But what’s crucial is when the market underperforms, I’ll be able to maintain my performance because of the “dividend support”.

This is because I try to stay away from the most expensive companies in the index. When the market drops, it’s the more expensive stocks that pulls the index down. 

Source: My IBKR account

How I Pick Stocks

As a dividend investor, conventional wisdom tells me I should avoid companies that pay a low dividend yield. I disagree.

Dividend growth investing looks at a dividend’s growth, driven by quality fundamentals of a company.

One example: I own Hershey’s in the portfolio. This is a simple yet long-lasting business that dominates almost half of US chocolate market share. Over the years, the company has been growing dividends. If you’d bought Hershey shares at $35 per share about 15 years ago, today its shares give you a dividend yield of 12% on your purchase cost. Last year, Hershey’s paid $4.46 dividends on each share. 

Source: seekingalpha.com

Now, what you probably don’t want to do is look for companies that may have cut dividends over the years. I used to invest in a shipping company called, Pacific Basin was a stock I used to invest. It’s one of the best shipping operators in the world, operating Handy-size and Supra-max vessels.

While Pacific Basin is a perfect stock for cyclical plays, it’s a bad dividend pay master. Some years, Pacific Basin paid good dividends. Some years, it had to cut dividends. Such “special situations” mean you buy such stocks when it’s really cheap, and sell off when the market trades the stock higher. But that’s not what I’m seeking.

Instead, I want to hold on to stocks that can continuously compound its earnings and dividends. 

Source: seekingalpha.com

When Do I Sell My Stock?

There are two big reasons why I’d sell a stock. 

  1. When a company’s fundamentals weaken – continuous fall in revenues, profits and the company start cutting dividends. This is due to changes in economic conditions, changes in dividend policies. To me? Management is not confident of the company’s future anymore. The company is in deeper trouble if it starts to borrow debt to pay dividends. And if dividends paid out is more than its profits. That’s why I like great businesses. But I’ll never fall in love with the stock. 
  2. When a stock’s valuation gets too expensive (overvalued). This means, when the price goes up and the yield gets too low, you want to sell the stock, take profits and reinvest into a higher yielding stock. This is called a “yield pick-up”.

But these rules aren’t carved in stone. Which brings me to my next point

When Not to Sell My Stock?

If there’s a major recession that leads to temporary fall in earnings, or if there’s a temporary cut in dividends during a recession – like COVID, I’d still continue to hold. This is because I look at the long-term competitive moat of a business. If it continues to grow, I wouldn’t let temporary setbacks to a company affect my investing decisions.

If the underlying business continues to grow, and you’re collecting healthy dividends – growing yield. Don’t need to sell. I’ll continue to monitor the business every six months to a year. 

Check whether the company is just getting things right. Or it might face temporary hiccups – like COVID. Companies resume their operations very fast if it’s a resilient, highly predictable business. They might temporarily reduce dividends and quickly resume it after one or two years. This is not a big problem. If a stock can continue to produce good returns, though it didn’t raise dividends and if your yield is good enough, keep the stock. 

On the other hand, if the dividend is no longer secured, and may be cut permanently, sell and look elsewhere.

Don’t forget, you still make money reinvesting dividends in a stock price that goes nowhere. I mean, if you’re enjoying a 10% yield, the company is doing well and this is just a temporary period — company may not grow dividends, but the pay-out is reasonable and the company is still going strong and management is sound, then I wouldn’t panic. 

If you can learn not to get affected by every little hiccup in the business, the way the market freaks out, then you’ll hold on to your stocks more easily, and compounding dividends to work for you.

But most importantly, use judgment and assess whether a company is worth keeping, and healthy to continue going.

How I Buy Stocks

Building a high-quality dividend portfolio doesn’t need to be complicated. As a guide, each month I plan to deploy 5-10% of my portfolio picking stocks from my stock watchlist. I’ll add stocks that I’d owned the smallest dollar amount to build the position. 

With this allocation strategy, I can quickly build up a portfolio of stocks. My plan is to start off with 10 stocks, then 20 stocks, then eventually hitting about 30 stocks. 

Diversification

My portfolio is broken into different sectors and industries. At first glance, it looks a lot. But the point I want to make is: you need to diversify across different places. 

I know technology is a popular sector today. But you don’t have to follow the trend. I chose to diversify according to my circle of competence.

As a career analyst who worked in the banking industry, I know more about financials, hence I allocate more of my capital into the financial sector. I also like the consumer sector because it’s simpler to understand.

Source: My IBKR account

Further, I plan to increase my allocation in Asia, including China and Singapore stocks. The problem with investing is always human error. And diversification helps to increase the chance that some of my stocks become big performers.

At the same time, diversification reduces the chance of making a big mistake. I sleep better.

Source: My IBKR account

What Are My Risks?

I don’t think fundamental analysis is a “fail-proof” strategy. Sometimes, we make human errors. The way I see it, fundamental analysis gives me a higher chance of success in stock picking than other strategies. 

What’s more, I don’t believe the stock market is perfectly efficient either. There are times when the stock market is so fearful it’s easier to accumulate stocks at a cheaper price. 

I don’t let one single stock dictate my actions. If a business doesn’t perform well, I won’t hesitate to cut my positions. Peter Lynch says it right: you only need to be right about 60% of the time to consistently compound your portfolio.

As a Singaporean investor, I’m subjected to withholding tax for overseas dividends:

  • Singapore dividends: 0% tax
  • Hong Kong stocks: 10% tax on China- companies
  • US stock: 30% tax

I’m willing to accept these risks because I believe both capital and dividend growth outweigh withholding taxes on dividends.

This portfolio invests in both US and Asia stocks. It will have foreign exchange risks. But my take is: the returns will far outweigh the risk over time. While the Singapore dollar is ridiculously strong now, I believe the US dollar will still have a place in the world economy. China on the other hand too. 

Sometimes, you need money because of an emergency. But I highly recommend not to interrupt the compounding machine. If possible, get some money from your spouse or family first. It’s worth avoiding interrupting your compounding machine. I mean, since you’ve already put in the hard work, make sure you achieve your financial goals.

The Journey to Compound Income for Life

I manage my friends and family portfolios today, including my mom’s retirement portfolio. There are different approaches to dividend investing, based on your capital and time horizon.

I’ve designed this smaller portfolio that in 10 years, I expect my portfolio to compound at an average 10% per year. I want to be clear here: you cannot achieve a 10% return immediately. Some years your performance will go up, some years your performance will go down. But your average return should be about 10% per year. 

I also pick stocks that will grow its yield over time – ultimately producing a very high single-digit dividend yield. How to achieve this? By the Rule of 72, dividends should more than double in seven years. Which means, if I pick a stock that yields 4%, its yield will hit 8% in less than ten years.

Note: this portfolio must compound together with active income to maximize its potential. This means, continuously adding salary income or savings to grow this portfolio value.

Investing is an ongoing journey. You have to treat your stock portfolio like a business. Your stocks are your inventory, the data software and research tools are your assets, and you are the boss that builds the profit machine. You need to know your investment blueprint, when to execute the trades, read management transcripts, analyse financial statements and attend conference calls.

If you like to check stock market prices daily, read patterns and business news – that’s great. That works for others. But if you want to accumulate great businesses, check in occasionally to make sure everything is going to plan, then you might want to think about a longer term, passive income strategy. For me, I don’t like to sit in front of the computer to “day trade” the whole day.

Dividend investing gives me the passion to enjoy what I do: write, teach, share, inspire. I write a blog, guest host on radio and occasionally go on media. What’s more, to spend more time with my family. 

People tend to argue what’s the BEST strategy. Well, after investing 13+ years, there’s no such thing as best. It’s only what works for you and your lifestyle. Building a dividend portfolio gives structure to the way I work – my strategy, my research and being beholden to myself, family friends and DT readers and members. I want that.

I hope by sharing this update gives you more clarity on how to dividend growth investing. 

Sometimes, investing can be simple. 

Willie Keng, CFA

Founder, Dividend Titan

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