High-yield dividend stocks step into limelight

High-yield dividend stocks step into limelight
Posted on 2 January 2014 - 05:40am
Liew Jia Teng
[You must be registered and logged in to see this link.]

PETALING JAYA (Jan 2, 2014): High-yielding dividend stocks of Bursa Malaysia are likely to catch investor's eye in 2014, given the expected inflationary pressure from the subsidy rationalisation programme and government's fiscal reform.

As a result of higher inflation due to the subsidy and tax reform agenda that is being pursued by the government, coupled with the market expectation on the central bank to keep overnight policy rate (OPR) on hold, the deposit interest next year is likely to be outpaced by the inflation rate.

To beat the inflation, as well as to beat the interest rate of fixed deposit, market analysts opined that nvesting in the high-yielding dividend stocks is not a bad option.

"As interest rates are seen to be low with upside bias in future led by the US recovery, low risks investors may shift from long-term bonds to high dividend yield stocks as alternative," said Areca Capital Sdn Bhd CEO Danny Wong Teck Meng.

Better economic outlook and positive global recovery may boost corporate earnings, thus provide better dividend payments, he told SunBiz via email.

"Although the encouraging business environment may limit dividend payouts as a result of business expansion, I think the overall dividend yield may be higher," said Wong.

A quick check on Bloomberg showed that 900 over public listed companies (PLCs) in Bursa Malaysia, only about 136 companies have an estimated dividend yield of more than 3%, higher than the key interest rate.

Checks also showed that only 12 companies provide dividend yield of more than 7%, including Eng Kah Corp Bhd, Uchi Tech Bhd and Matrix Concepts.

Other stocks include Tower Reit, Hektar Reit, Atrium Reit, Amanahraya Reit and Starhill Reit, keeping up to real estate investment trusts (Reit) reputation of being high-yielding dividend stocks.

Dividend yield, dividend payout ratio and dividend per share are all inter-related, Wong said, but he will ultimately look at dividend yield, as it associates with the share price at entry as well as the share price movement for decision making.

"Generally, those investors who look at dividend yield believe that high dividend paying stocks are more resistant than the low yielding securities to price correction, while enjoying higher returns than deposits and even some bonds," he said.

Wong said the high dividend stocks are deemed to be better run businesses due to their ability to generate good returns for dividend. Therefore, dividend stocks are more attractive than bonds, especially in the recent low interest rate environment.

As a smart investor, one should always include dividend stocks in the investment portfolio to beat the inflation, said Anbound Research Center (Malaysia) Sdn Bhd analyst Fung Vun Ket, adding that a stable dividend stocks is better than a one-off spike dividend stocks.

He told SunBiz via email that due to the current economic and political environment, short-term and medium-term investors should perhaps show a preference for dividend stocks next year.

"Yes, the overall dividend yield of Bursa Malaysia companies should go up. However, that does not mean all counters would see their dividend yields to grow at the same pace, or will grow," Fung added.

Based on historical record, should the Malaysian economy continue it growth path and there is no financial downturn or collapse from external factors, the overall dividend yield should be higher than the previous year, said a market analyst who only wants to be known as Ng.

However, he said, on a holistic approach, investors also need to assess a company's profit sustainability and capital expenditure requirement, as well as the intention of the board of directors and the future growth potential of the company, before calling a decision to invest in a company.

This is to ascertain the company's ability to pay dividend, as only less capital intensive industries will be able to distribute free cash flow as dividend, while a growth company will require more cash to grow instead of paying out dividend.

"All in all, the usage of dividend yield, dividend per share and dividend payout is secondary and not sustainable if the above criteria are not used," said Ng.

Dividend yield is important only if the investor know what it is, when to use and how to use it, he said, while the investment decision should not be made based on any single indicator.

"The financial indicator, as the name suggests, is only an indicator. Investors need to do more than that to achieve financial success. As we know dividend yield is a function current market price against the recent declared dividend," he said.

Should market price of the underlying securities trend downwards against the existing dividend, dividend yield will become attractive. Investors therefore he said should always look at the historical dividend yield of a stock over the span of at least five years, instead of a single year, before making a decisison to invest.

Fung concurred by saying dividend yield is not the most important criteria in picking stocks, as there are various factors that would influence the dividend yield, including share price movement, the earning performance of PLCs as well as the external environment.

Dividend yields, dividend per share and dividend payout ratio are equally important, he said, but realistically, not many counters would fulfill all three aspects.

"It all depends on the investor's preference. If you like REITs, the dividend yield is usually higher than the others, but the share price will not appreciate much. If you like Nestle (Malaysia) Bhd or British American Tobacco (Malaysia) Bhd, the dividend per share could be higher, but the dividend yield might be lower than fixed deposits," said Fung.