Sunday, February 16, 2014

How Dividend increase can help achieve your goal faster

As a passive income investor, one of the main objective is to look at dividend growth stock that can give us passive return that well compensates our need. Some may be comfortable at 4% yield while others may require 7% yield. But all in all, a company that can increase their dividends over time will be one that investors seek for and it can help us achieve our goal at a faster rate.


Dividend increases usually mean that the company are doing well and they are returning excess earnings to shareholders in the form of dividends. They usually play a huge part in the investor's cash flow for years to come.

Consider Vicom for example, the company's earnings have been growing steadily over the years and so does its dividends. They are comfortable doing this not only because earnings have increased but also because their payout is relatively low compared to others. Thus, in times when earnings might be affected, they are able to use the excess earnings that is retained to give a higher payout to investors in the form of dividends. Here are the figures for the past 5 years from 2008 to 2013.

VicomDividend per share% Growth
20090.11826.9%
20100.16237.3%
20110.1768.6%
20120.1823.4%
20130.22523.6%

Consider another example, ST Engineering. Their returns in dividends over the past couple of years have been in the single digit growth though decent for the past 3 years. One thing investors need to take note though is that ST Eng payout is in the range of 90% so the company does have very little earnings retained for further growth. Dividend growth for the company are dependent on the earnings which gives a vicious cycle of how is the company going to grow growth if earnings retained are small.


ST EngDividend per share% Growth
20090.158-11.7%
20100.133-15.8%
20110.1469.8%
20120.1556.2%
20130.1688.4%

What about Reits then? Investors would know that Reits tend to payout more than 90% earnings to investors and have very little earnings retained. Thus any acquisition or improvement in yield would need to be funded via debt or equity which gives a vicious cycle to investors especially if the acquisition is not yield accretive. So the structure Reit investors can expect is dividends, more funding, higher earnings, more dividends, more funding and so on...

A few other companies which I have not looked closely at probably fits into the above criteria as well. Jardine, Banks, Keppel are probably a few of those that have increase dividends over time. Perhaps, we should be looking closely at this. Dividend increases over time can really help you and I achieve our goal together and ...faster.


13 comments:

  1. Hi B,

    Perhaps I should pose a question - does a higher pay-out ratio necessarily signify lower growth prospects? Using your examples of VICOM and ST Engineering, even though VICOM has a lower ratio (70% up from 60%) compared to STE (now 90%), I'd still think STE has a more promising growth profile compared to VICOM, with its many divisions and having Government contracts. VICOM, on the other hand, cannot really expand its vehicular inspection segment and there are probably also limits as to how far it can grow its non-vehicular inspection arm.

    Therefore based on pay-out ratio alone, could you tell which company has better growth prospects?

    Another pertinent question (which should have been asked in your VICOM post, haha) - can VICOM raise their pay-out ratio further if they see no need to grow their cash balance unless there is some pertinent M&A opportunity? You mentioned they may tap on their existing cash balance to fund dividends if growth does not materialize, but note that they already generate about $10m excess cash which accumulates on the Balance Sheet every year - so why should they need to tap on their cash balance? Couldn't they raise pay-out to, say 75% or even 80%?

    Thanks!

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    Replies
    1. Hi Musicwhiz

      Appreciate your comments.

      Based on the payout ratio alone, we certainly cannot predict the growth of a company but we cant deny that it should have some kind of correlation to it if everything else such as capex etx remains the same.

      What I was trying to say is if I were the management of a company, the first thing I would want to make sure is to pay out dividends that is sustainable and growing and definitely one which does not exceeds my free cash flow. There are companies who are constantly increasing their dividend increases every year without the same corresponding increase in their eps. Take Vicom this year for instance, they can grow their dividends to over 23% while eps does not grow so much. They are able to do this as their payout is relatively low to begin with so they can increase a bit even when eps does not grow that much. Compare this against starhub for instance which are paying out already at 100%, they are less able to increase their dividends every year unless they have a corresponding increase in their eps which may or may not be hard to do it, but I think you get my point.

      If i am going to be honest the reason why im stil holding to vicom is because first it is still giving a decent yield of 4% at curren price. Secondly I am waiting to see how they are going to utilise the 78m cash hoard and the numbers will keep on growing by 10-12 m every year. At some point they hv to distribute this out or somehow use this to grow or invest in a better returns for investors. The growth is going to be slow for the next few years as you and I know but this is probably the only thing investors are waiting at the moment.

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  2. Some dividends are not meant for investors to keep forever.

    Some of us will know what are they. Right?

    Investors are just custodian of these dividends for a few years after that they will be taken back either part of them or all of them as re-investment "opportunities".

    They will promise investors "bigger" dividends for them to keep as custodian for another few years.

    The game continues .....





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    Replies
    1. Hi Uncle Cw

      If I catch you properly you are probably referring to Reits right.

      The issue with reits stems from because they are paying out dividends at such a high ratio that it is inevitable for them at such point to call for equity raising. I think the same issue goes for companies which pays out close to 100% ratio as dividends. Unless they hv utmost confident that businesses will grow organically if not they probably need the cash to invest in something which give them better productivity.

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  3. Hi B, CW

    Talking about Rights issue? If so, I agree since this will ultimately affect existing shareholders' holdings by diluting it.

    Aceirus

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    Replies
    1. No dilution if you take up all the rights entitled and also apply for excess rights.

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    2. but since there are now more share floats, won't this make the dividend payout less per share? Thanks

      aceirus

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    3. Hi aceirus

      Thats assuming the proceeds is used to purchase yield accretive acquisition.

      If the funds are used for other purposes such as repaying debts you will be getting lesser dividends with more floating shares due to dilution.

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    4. Its important to know how a company uses the extra capital raised or borrowed. Companies that cannot allocate capital efficiently to increase shareholders value is not beneficial to us.

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    5. Hi SGYI

      Spot on.

      I dont mind they did that to reduce their debts as long as the management can increase shareholders value in the long term

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    6. Hi B, SGYI,

      Agree. Based on what AIMS shared on sgx website.

      ~80% on AEI or possible acquisition
      ~17% debt repayment
      ~3% fees on rights issue

      So do you guys still think no dilution? :)

      aceirus

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  4. Dividends can come in handy, but you do want to know where they are going! Are they being reinvested? Are they being sent to shareholders? How does the company plan to continue growing? You can learn more about this topic at http://www.mutualfundstore.com/investment-planning/about-shares-stock-companies-market-cap as well as finding out more about stocks in general.

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