I don’t know about you but I would not say no to a pay rise every year. Whilst that might not always be possible to achieve in our day jobs, it’s possible to get something close to that in the stock market. In the USA, there is a list of shares called the Dividend Aristocrats. This is an elite group of companies that have increased their dividends every year for at least 25 years. We can’t claim to have such a prestigious group in Singapore yet, but we have got something approaching it. But before that let’s look at a…
I don’t know about you but I would not say no to a pay rise every year. Whilst that might not always be possible to achieve in our day jobs, it’s possible to get something close to that in the stock market.
In the USA, there is a list of shares called the Dividend Aristocrats. This is an elite group of companies that have increased their dividends every year for at least 25 years. We can’t claim to have such a prestigious group in Singapore yet, but we have got something approaching it.
But before that let’s look at a blue-chip that’s been a steady dividend payer. DBS Group Holdings (SGX: D05), for example, is one Singapore’s biggest companies with a market capitalisation of around S$39b. The shares yield 3.5%, which is higher than the Straits Times Index’s (SGX: ^STI) average yield of 2.4%. It’s also better than the 0.05% interest paid on savings accounts. DBS has also held its dividends at S$0.56 for the past four years, as seen in the graph below, giving shareholders a steady dividend return.
A Tale of Two Dividends
At a dividend yield of 3.5%, DBS’s shares might seem more attractive than, say, the 2.1% yield on Jardine Matheson Holding’s (SGX: J36) shares. But, take a look at Jardine Matheson’s dividend history.
The company, which is a multi-national conglomerate with diverse business operations, has increased its dividends consecutively for the past 10 years. The dividends have jumped more than five-fold from US$0.25 to US$1.35.
Investors who had bought Jardine Matheson’s shares at around US$16 in 2005, for instance, would have invested when the yield was 2.5%. That may not seem overly attractive. But because of the consistent dividend increases, the yield-on-cost for Jardine Matheson’s shares has become 8.4%. This equates to a total return on dividends alone of 44%.
In contrast, investors of DBS who bought shares on Jan 2005 around $16 would also have a dividend yield of 2.5%. But, the disappointing dividend growth would mean a yield-on-cost of just 3.5%, and the total return on dividends for DBS only adds up to 32%.
That is the power of yield-on-cost and why dividends can be a long-term investor’s best friend, if a company can consistently grow its dividends.
Let’s take a look at two more companies that have managed unbroken dividend increases since 2003.
Jardine Strategic Holdings (SGX: J37) is a holding company and it is part of the sprawling Jardine Matheson Group, that includes Jardine Matheson Holdings, Dairy Farm and Mandarin Oriental. Jardine Strategic has increased its dividend from US$0.145 in 2003 to US$0.24 in 2012. Its shares currently trade at 25 times earnings and yield 0.6%.
Dairy Farm International (SGX: D01) is a retailer with more than 5,600 outlets in 12 territories. Its dividends have grown by 400% from US$0.046 to US$0.23. The company’s shares are currently valued at 36 times earnings and yield 1.9%.
Foolish Bottom Line
A high dividend yield or steady dividend payments might look attractive in the short run. But over the long term, the difference in total dividend pay-outs between a growing yield and a stagnant dividend is something to bear in mind when investing. That’s why it might pay to look at a company’s past payout record as a guide. Although past performance is no guarantee of the future, it can provide some great clues about a company’s future performance.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.