Dividend stocks have long been favoured by stock market investors. Here are five promising ones to keep an eye on in 2022, as well as useful tips for evaluating any others you come across.
Dividend stocks are a popular investment in Singapore. The idea is to invest in a selection of companies that share their profits in the form of dividends payouts. This allows you to build a passive income stream.
Dividend stocks are also flexible. You are free to do as you wish with the dividends you receive, whether it be cashing them out, or reinvesting them to buy more stocks and equities.
Companies commonly pay out dividends at fixed intervals, ranging from once a year, to once per quarter. There may also be bonus payouts offered from time to time.
Sounds great so far? Then read on to find out about five dividend stocks we think have an exciting future ahead, the pros and cons of dividend stocks, and some important metrics you need to know before investing.
Understanding dividend yield
Before we dive into the deep end, let’s start by understanding dividend yield.
Simply put, the dividend yield of a stock is the amount a company pays shareholders for owning a share of its stock, divided by its current stock price. As such, dividends are announced on a per-share basis, and are expressed as a percentage.
For example, ABC Inc. declares a dividend of S$0.10 per share for Q12022. Its current share price is S$1. This means that the dividend yield is 10% (S$0.10 divided by S$1).
You have 2,000 shares of ABC Inc. Hence, you will receive S$0.10 x 2,000 = S$200 in dividends.
From the example above, we can glean that dividend yields are impacted when the stock price changes. An increase in stock price will cause the yield percentage to drop, while a decrease in stock price will cause the yield percentage to rise.
So when a company’s dividend yield increases, is it automatically bad, because it means its share price has fallen?
Not at all. You see, when a dividend-paying company performs well, it is likely to increase the amount of dividends paid. This will also cause the dividend yield to rise.
Returning to our example, if ABC Inc. had a bumper year, it might decide to increase its dividend payout from S$0.10 to SS$0.15 per share. For simplicity, let’s assume the share price remains at S$1 per share.
Therefore, the dividend yield is now 15% (S$0.15 divided by S$1), and you would receive S$0.15 x 2,000 - S$300 in dividends. Meanwhile, the value of your investment remains the same at S$2,000 (S$1 x 2,000 shares).
5 great dividend stocks for 2022
Boustead Singapore Limited (SGX: F9D)
An investment holding company headquartered in Singapore, Boustead Singapore Limited has operations across the Asia Pacific, Australis, the Americas, the Middle East and Africa.
The company provides infrastructure-related engineering and geo-spatial services, including the design, engineering and supply of products used in the energy and industrial sectors.
Dividend yields saw a sharp rise in 2021, after remaining fairly stable in the preceding two years. This can be attributed to an increase in earnings and free cash in recent quarters.
EC World REIT (SGX: BWCU)
EC World REIT is a Singapore real estate investment trust (REIT) that focuses on income-producing properties used primarily for e-commerce, supply-chain management and logistics purposes.
Its portfolio currently holds eight properties located predominantly in China’s largest e-commerce clusters in the Yangtze River Delta, Hangzhou and Wuhan.
Since its inception in 20156, the trust has provided dividend returns of between 8% to 9% each year. Its consistent performance has helped it cement a place among Singaprean dividend investors.
Prime US REIT (SGX: OXMU)
A fairly new REIT established in Singapore, Prime US REIT’s investment thesis is structured around stabilised income-producing prime office properties in the United States.
Its portfolio comprises 14 Class A freehold commercial real estate holdings, located across 13 key cities in the country, including California, Florida, Texas and Missouri.
This REIT might be worth considering for investors looking to diversify their portfolio across geographical lines. Additionally, it is well-positioned to benefit as office space occupancy recovers as COVID-19 restrictions are eased.
Micro-Mechanics Holdings Ltd (SGX: 5DD)
A manufacturer and supplier of high precision tools and parts used in semiconductor, medical, aerospace and other high-tech industries, Micro-Mechanics has been rewarding investors with steady, consistent dividend payouts.
But what’s interesting is that the company, which operates in Singapore, Malaysia, Philippines, Thailand, USA, and China, has seen increasing dividend yields since 2017, paralleled by a similar rally in share price.
A striking recent development is how Mirco-Mechanics saw revenues of S$73 million in 2021 on the back of a surge in demand for semiconductors.
With current geopolitical tensions placing extra emphasis on the semiconductor and other high-tech sectors, the company’s outlook remains robust, making this dividend stock another one to watch.
Wilmar International Ltd (SGX: F34)
Between Russia’s invasion of Ukraine, supply chain issues and the COVID-19 pandemic, food security has come into sharper focus than before. This could explain the recent fortunes of Wilmar International Ltd, an agribusiness company that operates in China and across the world.
Observe the exhilarating climb in dividend yields over the past 14 years, from 1.19% in 2008 to 4.53% in 2021, its highest yield yet. This is paired with the entity’s solid fundamentals, as evidenced by rising revenue in the past five years — especially in 2020 and 2021. In particular, the company last year reported a 30% increase in revenue year-on-year.
All these make for a compelling case why F34 deserves a place high on your watchlist, if not in your portfolio.
Dividend stocks — pros and cons
|Dividend income is tax exempted||Investment risk not necessarily lower|
|Provides passive income stream||Low sector diversification|
|Dividends received can be reinvested|
Pros of dividend stocks
Perhaps the biggest pro of investing in dividend stocks is that the dividends you return are not considered as taxable income in Singapore. This means that you do not have to declare them in your income filing, and won’t have to pay taxes on your gains.
Dividend stocks provide passive income, which is awesome no matter which way you cut it. Who doesn’t want to receive money that doesn’t require any effort or time on your part?
If you don’t want to cash out your dividends, you can simply reinvest them to increase the holdings in your portfolio. You can buy more stocks from the same company, or use the earnings from your dividends to invest in other promising candidates.
Cons of dividend stocks
Dividend stocks offer a compelling proposition, but that doesn't mean they are without faults.
The dividend payouts you receive are not linked to the prices of the underlying stock, and neither is receiving them testament to the underlying health of the company (more on this in the next section).
This means stock prices (and thus the value of your investment) can fall through the floor, even as you continue to receive dividends. As such, dividend stocks are not necessarily any safer than other forms of stock investing, and investment risks still remain.
Another con to be aware of is that dividend stocks tend to be clustered around certain sectors, such as REITS (Real Estate Investment Trusts). This can make diversifying your investment portfolio a little more difficult with just dividend stocks alone.
How to evaluate a dividend stock
Dividend stocks may be particularly attractive for investors who like the idea of building a passive income stream. However, that doesn’t mean that every stock that pays out high dividends is a good addition to your portfolio.
Rather, it is more important that the underlying company is in good shape, and has strong fundamentals. There are, of course, multiple factors that determine how healthy a business is. But, for our purposes, there are two main factors — financial ratios, really — to pay attention to.
Dividend payout ratio
Not to be confused with the dividend yield, the dividend payout ratio indicates the portion of the company’s earnings paid out as dividends to investors. It is calculated using the following formula:
Total annual dividends paid ÷ total annual earnings = dividend payout ratio
Now, if a company pays out too much of its earnings, that means there is less funds leftover to expand operations and grow its business. Hence, an exceedingly high dividend payout ratio may not be sustainable for the company in the long run.
What is considered a healthy dividend payout ratio differs according to the age of the company.
Younger companies tend to have a lower dividend payout ratio, as a greater proportion of its revenue should be reserved for future business needs.
More mature or established companies, on the other hand, can afford to allocate more earnings to dividend payouts, and would thus have a higher dividend payout ratio.
Also, note that average dividend payout ratios vary across industries. Hence, comparing among companies operating in the same sector would give you a more accurate picture.
Free Cash Flow to Equity
Ideally, dividends should be paid out from the company’s free cash, which is cash that the company has left over after allocations to critical or necessary expenses.
Hence, another metric to pay attention to is Free Cash Flow to Equity (FCFE).
You’ll want FCFE to equal or exceed dividend payments — this means that dividends paid out have no negative impact on the company’s finances.
If the opposite is true — FCFE is lower than dividends payment — that means there’s a shortfall. This shortfall is likely made up by tapping into other sources of funds, such as debt or existing capital.
Read these next:
How To Build A Dividend Portfolio For Consistent Returns
A Complete Guide To Dividend Investing (And The Best Singapore Stocks To Start With)
DBS, OCBC or UOB: Which Bank Gives You The Greatest Dividend Yield?
5 Of The Best Things You Could Do With Your Investment Dividends
Best REITs In Singapore 2022 For Your Investment Portfolio